On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed by President Trump and became law. Because the CARES Act is a complex, 880-page law, we expect additional guidance will be issued in the days and weeks ahead.
We have sifted through a variety of sources to provide what we hope is a helpful summary of key provisions in this complex law that are likely to impact many of our builders. Due to the impacts of the Coronavirus on the economy, we urge each of our builders to immediately contact their legal and accounting/tax professionals to see how the CARES Act affects you. The CARES Act is intended to deal with immediate economic problems and therefore has many deadlines, after which benefits under the CARES Act will not be available.
Employee Retention Credit
Eligible employers that were negatively impacted by the pandemic (see details below) are allowed a credit against employment taxes, beginning with first quarter 2020, equal to 50% of the first $10,000 of qualified wages paid from March 12, 2020 through December 31, 2020.
- Eligible employers include those that were carrying on a trade or business during 2020, until their operations were fully or partially suspended due to an order from an appropriate governmental authority. They remain eligible as long as the order remains in effect.
- Eligible employers also include those with gross receipts in a calendar quarter that were less than 50 percent of their gross receipts for the same quarter in the prior year. Once they become eligible for the credit, they remain eligible until their gross receipts exceed 80 percent of their gross receipts for the corresponding calendar quarter in the prior year.
- All wages paid qualify for the credit for employers with 100 or fewer employees. If employers have over 100 employees, the rules are more complicated.
Paycheck Protection Program – Small Business Administration Loans
Keeping businesses afloat and workers under the wing of their employers is critical for ensuring the economy can quickly restart after the pandemic subsides. For this reason, the Act creates a roughly $350 billion federally guaranteed loan program for small businesses that employ 500 or fewer people and who must pledge not to lay off their workers. The loans will be available during an emergency period ending June 30, 2020 and can be forgiven if the business uses the loan funds for approved purposes and maintains the average size of its full-time workforce, based on when it received the loan.
Businesses with fewer than 500 employees have access to loans under Section 7 of the Small Business Act during the covered period between February 15 and June 30, 2020. Each loan is limited to the lesser of $10 million or the sum of:
- average monthly payroll costs (defined below) for the one-year period ending on the date the loan was made, multiplied by 2.5, and
- any disaster loan taken out after January 31, 2020 that was refinanced into a paycheck protection loan, or
Payroll costs are defined in part as the sum of: wages, commissions, salary, or similar compensation to an employee or independent contractor; payment of group health care benefits, including premiums; and payment of any retirement benefits. Payroll costs specifically do not include the portion of compensation of any individual employee in excess of an annual salary of $100,000, payroll taxes, and any qualified sick leave or family medical leave for which a credit is allowed under the Coronavirus Relief Act.
Loan proceeds under the program may be used to cover payroll costs, mortgage payments, rent, utilities and any other debt service requirements. Loans are available from SBA-approved lenders for up to a 10-year term (amortized) at 4 percent interest, with six months (and up to one year) deferral of principal and interest payments. Notably, certain SBA requirements are waived. Loans are available with:
- No collateral or personal guaranties of shareholders, members or partners
- No proving recipient cannot obtain funds elsewhere
- No SBA fees (may still have to pay lender processing fee) or prepayment fees
Additionally, certain payments may qualify for tax-free forgiveness, as explained below:
- These payments must be made during an eight-week period beginning on the date of the loan. They include payroll costs (defined above), mortgage interest, rent and certain utility payments.
- To seek loan forgiveness, the borrower must apply to the lender and include documentation of payments made.
- To encourage employers to maintain their workforce or their total payroll without salary reductions, there’s a provision reducing the amount that may be forgiven.
Employers who reduce their workforce during the covered period will have the amount of their loan forgiveness reduced. The amount of the reduction in loan forgiveness is calculated based on the reduction in the average number of full-time equivalent employees compared to one of two periods in 2019 or 2020.
Employers who don’t reduce their workforce but reduce the salary or wages of certain employees may also find the amount eligible for forgiveness reduced. The provision applies only to employees who earn less than $100,000 with salaries reduced more than 25 percent during the covered period. The amount by which the loan forgiveness is reduced is based on the amount of total salary reduction.
Employers can avoid the loan forgiveness reductions by rehiring the employees or increasing the employees’ pay within an allotted time period.
The U.S. Chamber of Commerce has an excellent summary of this SBA loan program: https://www.uschamber.com/sites/default/files/023595_comm_corona_virus_smallbiz_loan_final.pdf as does the National Law Review: https://www.natlawreview.com/article/paycheck-protection-program-sba-loan-program-expanded-cares-act
The Small Business Administration also has more information https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources and takes some loan applications. The SBA says its goal is to arrive at a decision on any disaster loans within two to three weeks. If it determines you are eligible, it will send you a loan closing document for your signature.
Payroll Tax Payment Delay
The CARES Act delays payment of 50% of 2020 employer payroll taxes to December 31, 2021, with the remaining 50% due December 31, 2022. The delay also includes self-employment taxes.
Net Operating Losses – Carrybacks and Income Offsets
Net operating losses generally results from business losses that exceed business income. Typically, net operating losses can only be carried forward and can only be used to offset up to 80 percent of taxable income in each succeeding year.
The CARES Act provides for a temporary repeal of the 80 percent limitation for losses incurred in years beginning before 2021. Losses arising in 2018, 2019 and 2020 are allowed a five-year carryback, but businesses may elect to forgo the carryback. Losses not carried back can offset 100 percent of taxable income in tax years 2019 and 2020.
Excess Business Losses – Passive Income Offset
The tax code contains excess business loss provisions intended to curb the ability to use business losses to offset passive investment income. Through 2020, the CARES Act temporarily and retroactively repeals the excess business loss limitation that was introduced with the Tax Cut and Jobs Act in 2017. As a result of this retroactive repeal, taxpayers who incurred a loss in 2018 or 2019 and were subject to the excess loss limitation can file an amended return to claim a refund. Additionally, any amount resulting in a net operating loss in a 2018 or 2019 can be carried back or forward in accordance with the net operating loss modifications discussed above.
Business Interest Limitation
The tax code limits the deductibility of interest expense attributable to a trade or business. Certain businesses and trades are exempt, as are businesses with average annual gross receipts over the prior three years of less than $26 million. The CARES Act amends the business interest limitation rules in 2019 and 2020, allow non-exempt businesses to deduct more of their business interest expense, thus decreasing their taxable income for 2019 and 2020.
Significant Provisions Affecting Individuals
In addition to the business-focused provisions above, the CARES Act offers individuals tax rebate checks and provides the unemployed with an unprecedented expansion of benefits and payments:
- Single Americans will receive tax rebate checks of $1,200, married couples will get $2,400 and parents will receive $500 for each child. (Phase-outs exist, starting at $75,000 for single taxpayers and $150,000 for married couples).
- The Act expands and extends unemployment benefits. Unemployed individuals, including freelancers and furloughed employees, will get an extra $600 per week for up to four months, on top of state unemployment benefits. Unemployment insurance will be extended by 13 weeks. Because many states already provide 26 weeks of unemployment benefits, participants in those states would be eligible for a total of 39 weeks when adding the new 13 weeks of federal relief.
- The CARES Act also creates a new pandemic unemployment assistance program, which provides jobless benefits to those who are unemployed, partially unemployed or unable to work because of COVID-19 and don’t qualify for traditional benefits.
- The Department of Education will suspend payments for student loan borrowers without penalty through September 30.
- There are new protections against foreclosures on mortgages and evictions for renters.
Again, the CARES Act is complex legislation. The above summary is based on the information we have available to us now and is certainly not meant to be exhaustive. Instead, it is intended to help call your attention to provisions that may be relevant to you as a homebuilder.
If there is anything that is certain today, it is that very little is certain. Because of this, the CARES Act is a vital economic stimulus package for the country and for residential builders who have been or are about to be impacted by this coronavirus pandemic. While we continue to work through the challenges that this pandemic has created, we hope this summary is helpful to you.