A Closer Look at the CARES Act

Chris Gaetano
Published Date:
Mar 27, 2020


House legislators just approved the COVID-19 relief legislation that the Senate approved earlier this week, called the Coronavirus Aid, Relief and Economic Security Act, or CARES Act. The $2.2 trillion spending package is intended to shore up the economy in the wake of the massive disruptions taking place amid the global pandemic. The Trusted Professional will be doing a deep dive into many portions of this bill over the following days. Today we begin with the small business loans, the direct payments, retirement plans, and charitable contributions.

Direct Payments

The bill's most touted provision, and the one likely to be the most visible to the public once it's implemented, is a direct cash payment to most Americans. Overall, the bill will give Americans making under $75,000 a year in adjusted gross income a payment of $1,200, plus $500 for every child in their household, treated as a nonrefundable personal credit under the rules of Subpart A of the Internal Revenue Code. The credit tapers off by 5 percent of income past that $75,000 mark until, by the time the $99,000 threshold is reached, it disappears entirely. These income limits are doubled for joint filers, who will also receive $2,400 as their base credit. If someone files as head of household, that threshold will be $112,500.

Treatment of these credits will follow the rules outlined in subpart C of part IV of subchapter A of chapter 1 of the Internal Revenue Code.

The only ones explicitly stated to not be eligible for this payment are nonresident aliens, trusts and estates, anyone who is a dependent, and anyone lacking a Social Security number. CNN said that specifying a Social Security number as the only valid form of identification means that those who file with Taxpayer Identification Numbers, such as undocumented immigrants, will not receive the benefit.

In general, the government will determine someone's income by using either that person’s 2019 or 2018 tax return. In the event that someone did not file for either year, the government will instead use 2019 data from the Social Security Administration, specifically what's on the Form SSA-1099 Social Security Benefit Statement or Form RRB-1099 Social Security Equivalent Benefit Statement.

The government will contact recipients of these payments within two weeks of authorizing the payments for them, using their last known mailing address, to inform them that the credit is coming and what form it will come in.

Paycheck Protection Loans for Small Businesses

Another major aspect of the bill are paycheck protection loans to small businesses, overseen by the federal Small Business Administration. The "Paycheck Protection Program" will allow the SBA to guarantee loans meant to cover payroll costs for qualifying small businesses for the period from Feb. 15 2020, to June 30 2020.

These costs include salaries, wages, commissions, cash tips, paid leave, severance pay, group health care costs such as insurance premiums, retirement benefits, payment of state and local taxes assessed on employee compensation, and payments to sole proprietors and independent contractors of up to $100,000.

Covered costs do not include the compensation to anyone with salaries over $100,000, any federal taxes, compensation to those whose principal residence is outside the United States, or New York paid leave covered under the previous coronavirus relief bill (the Families First Coronavirus Response Act).

Loans can be issued to any business concern, nonprofit organization, veterans organization or tribal business concern, provided that they do not have more than 500 employees (or other existing statutory limits for a specific industry or entity). All workers, whether part-time, full-time, "or other basis" will count as an employee. Sole proprietors, independent contractors and self-employed individuals may also apply for these loans, provided that they provide necessary documentation such as payroll tax filings, Forms 1099-MISC or income and expense reports.

This 500-person limit is on a per-location basis: Businesses with more than one physical location, provided each one stays under threshold, may also receive a loan. Rules determining when the SBA will consider a business to be an affiliate, again provided that the business does not break the threshold, will be waived, provided that it is not a nonprofit or a veterans organization. The same goes for franchises and those that are receiving financial assistance from small businesses investment companies that meet the requirements outlined on Sec. 301 of the Small Business Investment Act.

The maximum loan amount allowed by a business is 2.5 times its average total monthly payments for payroll costs incurred during the year before the date the loan is made, plus the outstanding amount of SBA loans made between Jan. 31 and "the date on which covered loans are made available to be refinances under the covered loan."

So, the formula can be described as (average of total monthly payroll costs last year x 2.5) + (already outstanding SBA loans made since February).

If an applicant was not in business between Feb. 15, 2019 and June 30, 2019, then the calculation is the average total monthly payments from Jan. 1, 2020, and Feb. 29, 2020 times 2.5, plus the outstanding SBA loans made between "Jan. 31, 2020 and ending on the date on which covered loans are made available to be refinanced under the covered loan."

Or, alternatively, the amount can be $10 million. Whichever is less.

The loans can be used to cover payroll costs, health benefits, employee compensation, interest on mortgage obligations, rent, utilities and interest on debt incurred before the covered period.

In the event the borrower does not, or cannot, pay back the loan, the SBA "shall have no recourse against any individual shareholder, member, or partner of an eligible recipient of a covered loan," provided it was put only toward allowed uses.

Borrowers must certify that the uncertainty of the current economic situation makes the loan request necessary to support continuing operations; that they will use the funds to retain workers and maintain payroll or make payments on mortgages, leases and utilities; that they do not have an duplicative application already open; and that they have not received duplicative payments.

The SBA will collect no fees on these loans, will not bar those who can get credit elsewhere, will not require personal guarantees for the loan, and will not require any collateral. The loan will have a maximum maturity of 10 years, and will have an interest rate of no more than 4 percent. Further, the SBA will instruct lenders making these guaranteed loans to provide complete payment deferment relief for borrowers for no less than six months and no more than one year. This deferral covers principal, interest and fees.

The legislation also allows these loans to be sold on the secondary market. If someone tries to sell the loan on the secondary market to an investor, and the lender requests a deferral but the investor refuses, the SBA will just buy the loan itself so that the borrower can get relief. The SBA will not collect any fee for any guarantee sold into the secondary market.

Lenders should consider the loans to have a risk weight of 0 percent. Further, modifications made to these loans in relation to a troubled debt restructuring on or after March 13, 2020, do not have to comply with the ASC 310-40, which concerns with trouble debt restructurings by creditors, for the purposes of complying with Federal Deposit Insurance Corporation regulations.

The bill will reimburse lenders for processing these loans as follows: 5 percent of loans up to $350,000; 3 percent of loans from there to $2 million; and 1 percent of loans over $2 million.

Retirement Accounts Easier to Tap Early

The legislation also makes it easier to make an early withdrawal from one's retirement accounts. The bill allows up to $100,000 in aggregate distributions from all plans maintained to be treated as a "coronavirus-related distribution," meaning that the rules normally governing what is and is not a tax-free distribution, 72(t), will not apply. In fact, "if a distribution to an individual would ... be a corona-virus-related distribution, a plan shall not be treated as violating any requirement of the Internal Revenue Code of 1986 merely because the plan treats such distribution as a corona-virus-related distribution unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled groups which includes the employer) to such individual exceeds $100,000."

The distributions can be repaid any time within three years of it being received, provided such moves follow existing regulations on rollover contributions. In the case that the retirement plan is not an IRA, than the taxpayer is treated as having received the money in an eligible rollover distribution. If it is an IRA, then the distribution shall be treated under the rules of 408(d)(3) as having been transferred to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of distribution.

For the purposes of this legislation, a "coronavirus-related distribution" is any distribution that is made before the end of this year, to an individual or their dependents who have been diagnosed with the virus or to someone who experiences "adverse financial consequences" due to events such as being quarantined, furloughed, laid off, or having work hours reduced. The plan administrator may rely on an employee's certification that they satisfy these conditions. For those worried about how such distributions may affect their income for tax purposes, the legislation allows for the option to have the distribution be included in gross income "ratably over the 3-year-taxable-year period" starting with the year they took the distribution.

Minimum required distribution rules on certain retirement accounts have also been temporarily suspended for all of calendar year 2020 for defined contribution plans as described by 403(a) or 403(b), certain 457(b) plans, and individual retirement plans. Further, if any portion of a distribution during 2020 is treated as an eligible rollover distribution, but would not be so treated if the minimum distribution requirements had applied during 2020, such a distribution will not be treated as an eligible rollover distribution.

Any amendments to plans or contracts needed to execute the provisions in this bill prior to 2022 will be treated as being operated in accordance with the terms of the plan.

Charitable Contribution Limits Lifted

The bill will also temporarily suspend limits to the extent that charitable contributions can be deducted. Any qualified contribution shall be allowed as a deduction, although only to the extent that it does not exceed the contribution base over the amount of all other charitable contributions allowed. Corporations may also make deduct charitable contributions up to 25 percent of their taxable income over the amount of all other charitable contributions. In the case of S corporations or partnerships, the election is made separately by each partner or shareholder.

We shall continue our analysis of the CARES Act next week.

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