A Summary of the CARES Act and How it Benefits Small Businesses and Taxpayers

by: Smith and Howard

September 25, 2020

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The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020 to help businesses and individuals deal with the financial devastation caused by the COVID-19 pandemic. This article outlines how the CARES Act may benefit you and/or your business by creating potential cash flow opportunities.

Small Businesses

Several components of the CARES Act are aimed at helping small businesses and are highlighted below.

Paycheck Protection Program (PPP)

The PPP proved to be popular because it promises full forgiveness of the loan for businesses that meet all criteria. Additionally, the PPP Flexibility Act of 2020 made some important changes to the terms of the loan for the benefit of businesses.

To qualify for full forgiveness, businesses must spend 60% of the loan on payroll costs and can use up to 40% of the loan on qualifying non-payroll costs, such as mortgage interest, rent and utility payments for electricity, gas, water, transportation, telephone or internet access. Workers must be rehired or salaries restored by 12/31/2020. Once the loan funds are received, businesses have 24 weeks to use the loan and up to 10 months after that to apply for loan forgiveness. If portions of the loan do not qualify for forgiveness, business have up to five years to repay that amount at an annual interest rate of 1%.

The deadline to apply for a PPP loan has been extended to 8/8/2020 (as of 7/27/2020).

Economic Injury Disaster Loan (EIDL)

The Small Business Administration is providing low-interest working capital loans of up to $2 million each to small businesses and nonprofits affected by the pandemic. While the terms of the loan are established on a case-by-case basis, they typically have a 30-year repayment term at a 3.75% annual interest rate. Repayment of loans will most likely only begin 12 months after receiving the first installment.

Tax Relief for Businesses

The CARES Act gives small businesses relief from taxation in several ways:

  • Some Qualified Business Income Loss Limitation rules in effect for 2018 and 2019, such as the $500,000 business loss limitation, have been suspended. These suspensions can potentially generate refunds for tax years 2018 and 2019 through amended returns where applicable.
  • Five-year Net Operating Losses (NOL) Carryback – A provision allows NOLs generated in taxable years beginning after 12/31/2017 and before 1/1/2021 to be carried back five taxable years.
  • Temporary Modifications for Sec. 461(l) Excess Business Loss Limitations – Applicable to tax years beginning after 12/31/2017, noncorporate taxpayers are allowed deductions of excess business losses arising in 2018, 2019 and 2020. Wages will not be considered business income when the provision returns in 2021.
  • Modifications to Section 163(j) – Interest Deduction Limitation:

1. The adjusted taxable income (ATI) limit for 2019 and 2020 has been increased from 30% to 50%.

  • For business partnerships, the limit increases to 50% for 2020 only. However, partners who had excess business interest (EBI) allocated to them in 2019 can deduct 50% of that amount in 2020, regardless of any other Section 163(j) limits.

2. Taxpayers can use the 2019 ATI for 2020 limits.

  • Qualified Improvement Property (QIP) – Nonresidential buildings that have interior improvements made by the taxpayer and placed in service after 12/31/2017 can now be designated as 15-year property for depreciation purposes. This is considered beneficial as it makes QIP eligible for 100% bonus depreciation, allowing businesses to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building.
  • Payroll Tax Deferrals – Taxpayers (including the self-employed) can delay paying the employer portion of certain payroll taxes through the end of 2020. Specific percentages and applicable dates apply.
  • Payroll Tax Credits – A refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees applies to wages paid after 3/12/2020 and before 1/1/2021.

Tax Relief for Individuals

Among the benefits:

  • A one-time stimulus payment was sent to individual taxpayers who qualified.
  • Principal and interest payments on federally-held student loans have been suspended through 9/30/2020.
  • Changes to retirement funds include a waiver on taking required minimum distributions in 2020; allowing repayment of any hardship distribution taken in 2020 over three years without the usual plan limits being imposed; and increasing the withdrawal limit to $100,000 or 100% of the vested loan balance, whichever amount is lower.

Moving Forward

As a result of the CARES Act, businesses have more opportunities for positive cashflow during this difficult period. Consulting a certified public accountant, especially one with expertise in your industry, may help you identify and benefit from these opportunities.

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