Some Answers about the CARES Act

Challenges: Read

Posted by Mike Payne

Estimated Reading Time : 12 min.

Mike Payne, President & Owner of Hill Manufacturing & Fabrication, breaks down everything you need to know about the CARES act.

If you’re anything like me, you’re doing everything you can to navigate this current environment. As I’ve told my team, there is no playbook and the only thing I can promise is to lead our company through this current market as best as I can using faith, hard work, commitment and shared best practices coming from the private and public sectors.

I’m fortunate to have a close network of fellow business owners, across several industries, to learn alongside. I’d encourage all manufacturing leaders to make a habit of visiting with other shops, your vendors, and customers to discuss what’s helping. Also, reach out to your network of leaders outside of the metal working nation. They are doing things you can’t, for example none of us will be sending equipment home for CNC operators to work on from home. However, you might learn some best practices related to cash flow management, sanitization, new product opportunities and a magnitude of other things.

I’ve found one of the hardest things to stay on top of is the ever changing news. “Current” news and events have taken on an hour by hour meaning. Staying on top of this ever-changing environment is a lot easier with a network of leaders.

For example, over the past few days and weeks the federal government has been working on a relief package. For me, I found it was hard to cut through political analysis and understand how any relief would affect my company and my employees. Thankfully, through a group of excellent leaders I am affiliated with, I was finally able to get an unbiased breakdown of the tools and resources available. I found this very helpful at understanding options for my company and answering questions for my employees.

CARES Act Summary - 3/27/2020

Overview: The CARES Act was signed into law on Friday, March 27, 2020. The bill contains over $2 trillion of stimulus through loans and tax changes for individuals and businesses of all sizes. Some of the key provisions include partially forgivable loans for small businesses, payroll up retention tax credits, and significant increases in unemployment insurance payments for 2020.

Disclaimer: At the time of this writing, the following information was the latest information available, and this information is to be used as a guideline. It is recommended all information contained herein should be validated by an attorney and or tax professional. MakingChips holds no liability to what is written.

Individual Rebates and Provisions

Overview: The bill provides a variety of tax credits and flexible retirement fund provisions to individuals, including one-time payments to many households.

Who Qualifies:

  • All US individual except
    • Dependents
    • Estates or trusts

 

One-time Payments and Calculation:

For individual taxpayers

  • One-time check of $1,200
  • $500 for each child
  • For incomes up to $75,000 based on most recent tax return filed back to 2018 o
  • Phases out at $5 per every $100 over $75,000
    • Becomes $0 at $99,000 of income (for 0 children)

 

For married filing jointly

  • One-time check of $2,400
  • $500 for each child
  • For incomes up to $150,000 based on most recent tax return filed back to 2018
  • Phases out at $5 every $100 over $150,000
    • Becomes $0 at $198,000 (for 0 children)

 

For head of household

  • One-time check of $1,200
  • $500 for each child
  • For incomes up to $112,500 based on most recent tax return filed back to 2018
  • Phases ou tat $5 every $100 over $112,500
    • Becomes $0 at $146,500 (for 1 child)
    • Will be delivered directly to accounts listed in most recent tax return
    • Payments will be treated in the same manner as other tax refunds

 

Retirement Fund Special Changes:

  • For the remainder of 2020, 10% withdrawal fee from retirement funds is waived for up to $100,000 for coronavirus-related purposes
  • Coronavirus-related reasons
    • Diagnosis
    • Family diagnosis
    • Laid off or furloughed due to coronavirus
    • Reduced hours of a business owned by the individual due to coronavirus
      • Withdrawn amounts can be recontributed without regard to the cap over the next three years
      • For income tax purposes, the withdrawals can be applied to income in equal portions over the next three years
      • Minimum distributions are eliminated for 2020 for IRAs, 457(b), 403(a) and 403(b) plans

 

Tax Provisions for Charitable Contributions and Student Loan Payments:

  • Individuals can deduct up to $300 in charitable contributions above the standard deduction
  • 50% AGI limitation for charitable deductions is eliminated for individuals for 2020
  • 10% limitation for charitable deductions is increased to 25% for corporations for 2020
  • Employers can pay up to $5,250 of an employee’s student loans that are tax-free to the employee until 1/1/2021

 

Assistance for American Workers, Families, and Businesses

Overview: The bill expands unemployment insurance programs to include those not typically eligible for benefits, including gig workers and contractors.

Who Qualifies:

  • Individuals who are normally eligible for unemployment insurance
  • Individuals who are typically ineligible for unemployment insurance (i.e. gig workers, contractors) but have exhausted all other benefits and meet one of the following conditions:
    • Diagnosed or seeking diagnosis for COVID-19
    • Caring for a diagnosed family member
    • Caring for a child who is out of school due to COVID-19
    • Unable to reach place of employment due to quarantine
    • Needing to quit their job due to COVID-19 related reasons

 

Length of Assistance:

  • Maximum of 39 weeks between 1/27/2020 and 12/31/2020 o Upfromtypical26weeks
  • Additional 13 weeks of assistance available to those who have exhausted their benefits from a calendar year not ending before 7/1/2020
    • This extends past the 39 weeks up to a full 52 weeks
      • Effectively only applies to those who are already receiving benefits

 

Coverage:

  • Equal to what the covered person would receive under UI or pandemic emergency benefits plus
  • Additional $600/week for up to 4 months
    • This $600 applies to all recipients of unemployment insurance • No standard one-week waiting period

 

Funding:

  • Additional benefits are federally funded for states who have eliminated their one-week waiting periods for receiving UI benefits
  • Full funding of the first week of ALL UI benefits for states that eliminate the one-week waiting period

Example Benefit Amounts:

  • Oklahoma employee earning: o $40k/year
  • Standard pre-tax weekly pay: $769
  • Expanded UI weekly pay: $1,035 o $60k/year
  • Standard pre-tax weekly pay: $1,154
  • Expanded UI weekly pay: $1,120 o $80k/year
  • Standard pre-tax weekly pay: $1,538
  • Expanded UI weekly pay: $1,120 o $100k/year
  • Standard pre-tax weekly pay: $1,923 ▪ Expanded UI weekly pay: $1,120

 

Assistance for Mid-Sized Businesses

Overview: Businesses not eligible for other loan programs provided under the other portions of the Act will be eligible to apply for other loans through the Treasury.

Who Qualifies:

  • Businesses with between 500 and 10,000 employees which are not otherwise eligible for loans in the Act
    • Businesses must restore at least 90% of their workforce as of 2/1/2020 to full compensation and benefits
  • Businesses must retain 90% of their workforce through 9/30/2020

Loan Details:

  • Authority given to the Treasury to design and implement the program; few details exist currently as to application, etc.
  • Maximum interest rate of 2%
  • 6-months of deferral where no interest or principal is due
  • No distributions can be made to common stockholders while the loan is outstanding
  • The loan recipient cannot offshore jobs for the period of the loan plus an additional 2 years
  • The loan recipient cannot abrogate existing collective bargaining agreements for the period of the loan plus two years

 

Keeping American Workers Paid and Employed – Covered Loans

Overview Paycheck Protection Program (PPP):

The bill establishes a $350 billion loan guarantee program for small businesses, which is an expansion of the SBA section 7(A) loans. The individual loans are available up to maximum of $10 million vs the $5 million maximum previously set by the SBA section 7(A) loans.

Loan availability period: February 15 – June 30, 2020

PPP vs EIDL Loans

Applying for the PPP Loans made available through the CARES Act does not preclude an application for the Economic Injury Disaster Loan through the SBA, which provides small businesses with working capital loans of up to $2 million.

  • If a PPP loan applicant has an existing EIDL loan related to COVID-19, the applicant has the option to refinance the EIDL loan as part of the PPP Loan, effectively increasing the amount of PPP loan availability.
  • Applicants of the EIDL in response to COVID-19 may request an advance of $10,000 that they will receive within three days after the EIDL application is received. The $10,000 grant will reduce the total loan forgiveness amount, discussed below.

Who Qualifies:

  • Small Businesses: less than 500 employees
  • 500 employee limit does not apply to businesses in the restaurant and accommodations industry (NAICS code 72)
  • Possible issue of affiliation limits with Argonaut Portfolio Companies

Loan Amount: The loan amount available is the lesser of:

  • $10mm; or
  • Qualifying Expense Calculation: 2.5 x average monthly payments for payroll costs incurred during the 1 year period prior to the date of the loan

Payroll costs:

  • Include salary, wage, commission; payment for vacation, parental, family, medical, or sick leave; severance; health care benefits including premiums; retirement benefits; state and local payroll tax
  • Do NOT include: compensation of an employee > $100,000; compensation of employees with a primary residence outside the US; qualified sick leave or family leave wages for which a credit is allowed under the Families First Act.
    • Example: ABC Co. incurs total payroll costs of $24 million from March 1, 2019 through February 29, 2020, which results in an average monthly payroll cost of $2 million. The total loan available to ABC Co. is $5 million.

Fees and Conditions:

  • No loan fees applicable under paragraph (23)(A) and (18)(A)
  • Requirement that a business is unable to obtain credit elsewhere does not apply No personal guarantee required
  • No collateral required
  • No prepayment penalty
  • Covered Loan has a maximum maturity of 10 years Interest Rate: not to exceed 4%

Loan Forgiveness

  • Loan forgiveness is available for an amount equal to payroll costs, mortgage interest payments, rent, and utility payments incurred during the covered period.
    • Covered Period for purposes of loan forgiveness is the 8-week period beginning on the date of loan origination
  • Loan Forgiveness is excluded from taxable income
  • Loan Forgiveness Reduction
    • The loan forgiveness available through the bill incentivizes employers to maintain their workforce through the covered period. The total amount of loan forgiveness is reduced if the recipient reduces the number of employees or cuts wages by more than 25% during the covered period. Reduction in loan forgiveness is based on the following calculation:
  • (1) The average number of FT employees per month during the covered period divided by either (employer’s choice):
  • The average number of FT employees per month from Feb 15 – June 30, 2019; OR
  • The average number of FT employees per month from Jan 1 – Feb 29, 2020
  • (2) The total amount wage reduction if an employer reduces the wages of an employee in excess of 25% of the total wages of the employee during the most recent full quarter of employment prior to the covered period
    • For purposes of loan forgiveness reduction calculations, fulltime employees must earn an annualized salary of less than $100,000.
    • If an employer maintains 100% of employees through the covered period, they will achieve 100% forgiveness of the loan.
    • The Bill provides a grace period for rehiring employees. As long as employees who were previously terminated are rehired by June 30, 2020, the employer is still able to achieve 100% loan forgiveness.
  • Example: Over the 12 months prior to the loan origination date, ABC Co. has an average monthly payroll cost of $2 million covering 300 fulltime employees earning less than $100,000. Based on this average, the total covered loan available is $5 million ($2million x 2.5). From Feb. 15 – June 30, 2020, ABC Co. terminates 60% or 180 employees. During the 8-week covered period following the loan origination date, ABC Co. incurs $4 million in payroll costs, $400,000 in rent expense, $250,000 in utilities, and $0 in mortgage interest for a potential loan forgiveness total of $4,650,000.
    • If, by June 30th, ABC Co rehires all 180 previously terminated employees, expected loan forgiveness equals $4,650,000.
    • If, by June 30th, ABC Co rehires 20% or 60 of the previously terminated employees, the expected loan forgiveness equals $2,790,000 [$4,650,000 x (1-.4)].
    • If, by June 30th, ABC Co rehires zero of the previously terminated employees, expected loan forgiveness equals $1,860,000 [$4,650,000 x (1-.6)].
  • Example cont. In addition, ABC Co. decides to reduce wages of several higher paid employees by 40% for a total of $50,000 in cost reduction during the covered period. The total expected loan forgiveness will reduce by $50,000 in each of the above scenarios.

Lenders: The authority to make these loans is extended to lenders determined by the Administrator and the Secretary of Treasury to have the necessary qualifications to process, close, disburse, and service loans made with the guarantee of the Administration. Applicants will work directly with individual banks, credit unions, etc. to apply for these loans.

Loan Application:

  • Applicants must submit to a lender servicing the covered loan application:
    • Documentation verifying the number of fulltime employees and pay rates, including
      • Payroll tax filings submitted to the IRS
      • State Income, payroll, and unemployment insurance filings: Documentation verifying payments on covered lease obligations and utility payments
  • More detail on the application process will be released within 15 days of enactment Employee Retention Tax Credit

Overview: Certain employers who do not receive loan assistance through the covered loan program will be eligible for a $5,000/person tax credit.

Who Qualifies:

  • Businesses who receive loans through the covered loan program are NOT eligible/. Businesses who receive Mid-Sized Business loans ARE eligible
  • Businesses whose operations were suspended due to a COVID-19 related shutdown or
  • Businesses whose gross receipts declined 50% or more in a quarter compared to the same quarter the previous year
    • Applies until the business has a quarter in which gross receipts are 80% of gross receipts in the same calendar quarter from a previous year

Qualifying Wages for the Deduction:

Wages paid after 3/12/2020 until 1/1/2021, with further restrictions based on employee count below

  • For businesses with over 100 employees
    • Any employee that is paid but is not providing services due to COVID-19 related reasons
    • For businesses with 100 or fewer employees: All employee wages

Deduction Calculation:

  • 50% of eligible employee wages up to $10,000 per employee (for ALL quarters, not EACH quarter)
    • Max deduction per employee is $5,000
  • Credited against FICA tax
  • Fully refundable Examples:
    • Example: ABC Co. has an average monthly payroll cost of $2 million covering 300 fulltime employees, which includes $170,000 in employer-side FICA tax liability each month. From Feb. 15 – June 30, 2020, ABC Co. terminates 60% or 180 employees.
      • If, by June 30th, ABC Co rehires all 180 previously terminated employees, expected Employee Retention Tax Credit is $1,500,000 (300 x $5,000)
      • If, by June 30th, ABC Co rehires 20% or 60 of the previously terminated employees, Employee Retention Tax Credit is $900,000 (180 x $5,000)
      • If, by June 30th, ABC Co rehires zero of the previously terminated employees, expected

Employee Retention Tax Credit is $600,000 (120 x $5,000)

Social Security Tax Deferral Tax Deferral:

Employers will be able to defer payment of the employer-side Social Security tax or Nonpayment during 2020

  • Half of amount owed paid 12/31/2021 ▪ Other half owed paid 12/31/2022
  • Example: Employer owes $62,000 in SS tax each quarter
    • Employer can forego payment for the remainder of 2020, which would be $186,000 in SS tax ($62,000 x 3 quarters)
      • For the $186,000 in SS tax accrued by the end of 2020:
      • $93,000 payment would be due 12/31/2021 ▪ $93,000 payment would be due 12/31/2022

Other Bill Provisions Emergency Sick Leave Modifications:

  • Allows for employers to receive advance payment of anticipated credits from the Treasury
  • Loosens penalties for failure to deposit FICA taxes in anticipation of credit
  • IRS has been given authority to create forms and guidelines for this process

HSA Modification:

  • Employees can use HSAs for over-the-counter medications
  • Plans that have a $0 deductible for telehealth services will still qualify as HDHP

Mortgage-Related Provisions:

  • Foreclosures cannot be initiated in the 60 days following 3/18/2020 for holders of federally backed mortgage loans
  • Allows for forbearance requests for federally backed mortgage loan holders Community Bank Provisions:
    • Community bank leverage ratio to be reduced from 9 to 8 percent Business Tax Provisions:
      • Changes in NOL treatment: NOLs from 2018-2020 can be carried back 5 to prior years o 80% rule for NOLs temporarily suspended
    • All taxable income can now be offset with NOLs • Net interest deduction
      • Increased from 30% of EBITDA to 50% of EBITDA o For 2019 and 2020

Final Text: https://assets.documentcloud.org/documents/6819239/FINAL-FINAL-CARES-ACT.pdf