Nuts and bolts of COVID-19 relief legislation
Highlights of the just-passed Coronavirus Aid, Relief, and Economic Security Act (CARES) from the Associated Equipment Distributors.
The more than $2 trillion bill aims to support individuals and businesses withstand the devastating economic impact of the COVID-19 pandemic. A section-by-section analysis reported by the Associated Equipment Distributors (AED) is available here.
Bill highlights:
Creation of the Paycheck Protection Program.
This program will provide cash-flow assistance through 100 percent federally guaranteed loans to small (500 or under) employers who maintain their payroll during this emergency. If the employer maintains its payroll, then the portion of the loan used for covered payroll costs, interest on mortgage obligations, rent,and utilities would be forgiven. Loans would be available immediately through more than 800 existing SBA-certified lenders, including banks, credit unions, and other financial institutions, and SBA would be required to streamline the process to bring additional lenders into the program.
- Maximum Loans: Generally, monthly payroll costs for 2.5 months, not to exceed $10 million. Payroll costs exclude compensation paid to individuals, including the self-employed, above $100,000 a year.
- Requirements: The employer certifies loan will be used to retain workers, maintain payroll, make mortgage or lease payments and pay utilities.
- Loan Forgiveness: The borrower shall have a portion of their loan forgiven in the amount equal to their payroll costs (not including costs for compensation above $100,000 annually), interest payments on mortgages, rent payments, and utility payments between February 15 and June 30, 2020. Loan forgiveness will be reduced if the borrower reduces employment by a ratio similar to their reduction in employment or if the borrower reduces salaries and wages by more than 25 percent.
Employee retention credit for employers subject to closure due to COVID-19.
The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
Delay of payment of employer payroll taxes.
The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.
Modifications for net operating losses.
The provision relaxes the limitations on a company’s use of losses. Net operating losses (NOL) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to offset income fully. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.
Modification of limitation on losses for taxpayers other than corporations.
The provision modifies the loss limitation applicable to pass-through businesses and sole proprietors, so they can utilize excess business losses and access critical cash flow to maintain operations and payroll for their employees.
Modification of credit for prior year minimum tax liability of corporations.
The corporate alternative minimum tax (AMT) was repealed as part of the Tax Cuts and Jobs Act. Still, corporate AMT credits were made available as refundable credits over several years, ending in 2021. The provision accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.
Modification of limitation on business interest.
The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns by increasing the 30-percent limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020.
Exclusion for certain employer payments of student loans.
The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.
More announcements coming
For those employing more than 500 employees, it's expected the Federal Reserve and Treasury Department will be announcing new credit facilities that are likely to be set up to support lending to larger companies.
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