The CARES Act, which was officially signed by the president last Friday, provides an economic stimulus package for businesses and individuals affected by the current Pandemic. This law is a direct response to help businesses and individuals during the economic downfall directly related to COVID-19.

The CARES Act includes (but is not limited to):

• Enhanced Unemployment Insurance
• The Paycheck Protection Program
• Recovery Rebate for Individual Taxpayers
• Waived Penalty for Using Retirement Funds for Coronavirus Costs
• Refundable Payroll Tax Credit
• Increased limits for Charitable Donations
• Delayed Social Security Payments
• NOLs

Enhanced Unemployment Insurance (UI)

As unemployment numbers rise, it important to improve upon temporary unemployment terms.

This law expands the time period for which an individual can receive unemployment benefits by providing an additional 13 weeks on top of the state’s current unemployment coverage period. The maximum time allotted will be 39 weeks, meaning benefits will not exceed this limit. The federal government is also providing an extra $600 per week in benefits for up to four months. The coverage would be available to individuals who were eligible for unemployment benefits on January 27, 2020, through December 31, 2020.

The amount of assistance that an individual will receive depends on their state.

The program also creates the Pandemic Unemployment Assistance program for those usually not eligible for UI, such as the self-employed, part-time employees, freelancers, gig workers, and independent contractors, and those with a limited work history. Benefit amounts will be calculated based on previous income and will include the $600/week provided by the federal government.

Since this law is a direct response to the pandemic, there are limited reasons for which an individual qualifies:

• they have been diagnosed with COVID-19 and cannot work
• they need to care for a family member who has been diagnosed with COVID-19
• they need to care for a family member whose school, daycare or care facility has been shut down because of COVID-19
• they are in a self-quarantine, health provider-ordered quarantine or cannot get to work because of a quarantine
• they were about to start a new job and cannot because of COVID-19
• they had to quit because of the above situations. It will also cover employees whose employer has shut down because of COVID-19.

If an individual is still working but their hours have been significantly reduced, depending on the state, they may also be eligible to apply for unemployment.

Please note that this law is not intended to cover individuals who quit because they fear that continuing to work puts them at risk of contracting COVID-19.

$350 billion allocated for the Paycheck Protection Program

This is an immediate cash incentive meant to help small to mid-size businesses, who have fewer than 500 employees (with an exception for companies in the hospitality or dining industry with multiple locations), affected by the pandemic. Also eligible are sole proprietorships, nonprofit organizations, veterans’ organizations, and tribal businesses.

The program will help businesses continue to make payroll and cover other expenses from February 15 to June 30, 2020. The money will be funneled through a Small Business Interruption Loan and may be forgivable when used for payroll, rent, mortgage interest or certain utility costs and would be reduced proportionally by any reduction in employees retained compared to the prior year and a 25% or greater reduction in employee compensation.

A business may take out loans up to $10 million but the maximum loan amount specific to the business will be 250% of the business’s average monthly expenses for payroll. The amount borrowed can cover employees making up to $100,000 per year as well as payments for group health benefits, retirement benefits, state and local payroll taxes, and compensation to sole proprietors and independent contractors.

Recovery Rebate for Individual Taxpayers

The bill will provide a $1,200 refundable tax credit for individuals, $2,400 for joint taxpayers, and an extra $500 per child. The rebate will phase out at incomes of $75,000 for a single individual, $112,500 for the head of household, and $150,000 for joint taxpayers at 5% per dollar of qualified income, or $50 per $1,000 earned.

There is not a minimum income requirement but there is an income cap, phasing out at $99,000 for single taxpayers with no children and $198,000 for joint taxpayers with no children.

These cash payments will not be counted as taxable income for recipients as it is a refundable tax credit.

The 2019 or 2018 tax returns will be used to determine the cash advance, but taxpayers that are eligible for a larger rebate, based on 2020 income, will receive it in the 2020 tax filing season.

Note that if an individual did not file a 2018 or 2019 income tax return, and did not receive a Form SSA-1099 Social Security Statement, that person will receive their payment as a credit against their 2020 income tax return.

Waived Penalty for Using Retirement Funds for Coronavirus Costs

The 10% early withdrawal penalty on retirement account distributions will be waived (up to $100,000) for individuals who have been diagnosed with the virus or those who have a spouse or dependent that was diagnosed with the virus.

Money that has been withdrawn may be used to compensate for a financial loss due to either being in quarantine, a furlough, a lay off or work reduction due to the current pandemic as well as those unable to work due to lack of child-care. 

Withdrawn amounts are taxable over three years, but taxpayers can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account caps.

Eligible retirement accounts include individual retirement accounts (IRAs), 401Ks and other qualified trusts, certain deferred compensation plans, and qualified annuities.

Refundable Payroll Tax Credit

A 50% refundable payroll tax credit will be available to employers as a way to return employees who have been let go due to the pandemic, by hiring them back or putting them on paid furlough. 50% of up to $10,000 of payroll wages will be covered during the pandemic time period, including employee health benefits. However, the credit covers ALL employees if the business employs 100 or less. For businesses with over 100 employees, the credit only covers those NOT working due to the virus.

This credit is available to employers who have experienced a decrease in gross receipts of 50% or more when compared to the same quarter last year due to the coronavirus.

Please note that this tax isn’t forgiven. 50% will be owed starting in 2021. The remaining 50% will be then owed the following year in 2022 along with making payments for payroll taxes for 2021 and 2022.

Other Key Items

Increased limits for Charitable Donations

For those who make donations to charities during this time, the Act created a $300 above-the-line deduction for donations. For those who itemize, the Act expands the limit on contributions, allowing deductions of up to 100% of adjusted gross income for 2020, and a new limit of 25% of adjusted taxable income for corporations.

Delayed Social Security Payments

Payments of such payroll taxes can be delayed until January 1, 2021. Similar to the refundable payroll tax credit, 50% of the taxes will be owed on December 31, 2021, and the remaining half will be due in the following year on December 21, 2022.

NOLs

There are three changes the Act created for businesses with Net Operating Losses.

1. Those who have NOLs in 2018, 2019, or 2020 may carry those losses back five years
2. The 80% of taxable income is suspended. Businesses may use NOLs to offset taxable income.
3. Modified loss limitations for non-corporate taxpayers

Resources:
McGrath North
Tax Foundation