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Last evening the U.S. Senate passed a $2.2 trillion spending bill to support the economy.  Included in this bill are forgivable small business loans, a very important part of the bill, which will allow almost any business (self-employed and independent contractors are eligible) with less than 500 employees to borrow and to have that loan forgiven to the extent of a formula which includes payroll and healthcare costs.

The bill also includes FICA tax credits for employee retention, sick leave, and family leave.  Additionally, the bill allows a deferred employer side FICA taxes, where the business will be able to defer fifty percent (50%) of its FICA taxes (on the employer side only) till December 2021, and the other fifty percent (50%) till December 2022.

Moreover, the bill includes important income tax relief in the form of special penalty-free distributions from IRAs with repayment provision over three years, increased plan loan limits, and the suspension of the Required Minimum Distribution (IRD).

Further on the tax side, Congress is going to great extremes to free up Net Operating Losses (NOL), so that individuals that are losing money in their business in 2020 will be able to carry those losses back to earlier years to seek an immediate refund.

Critical Take-Away From The CARES Act

H.R. 748, SEC. 1102 Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

1) Payroll Protection Program/Loan (H. R. 748, SEC. 1102)

  • Allows a loan on a deferred basis for the covered period, which means the period beginning on February 15, 2020, and ending on June 30, 2020;
  • Basic Eligibility: Any business concern, non-profit, veterans organization or Tribal business; not more than 500 employees (generally);
  • Self-employed and independent contractors are eligible;
  • The loan can be used to pay: payroll costs, group healthcare benefits; employee salary, wages, commissions, or similar, payment of interest on any mortgage obligation associated with the business, rent, utilities, and interest on any debt obligations incurred before the covered period;
  • No requirement that business is not a le to obtain credit elsewhere;
  • Loans are nonrecourse – except if the proceeds are used for an unauthorized purpose;
  • No personal guarantee required;
  • No collateral required, but a good faith certificate will be required; and
  • General Loan Terms: Interest rate not to exceed 4%, 6-12 months of deferment including principal, interest and fees, and origination fees paid by SBA.
  • You can view a sample loan application by clicking the following

    —-> Paycheck Protection Program Application Form    &    Paycheck Protection Program Q&A

2) Payroll Protection Program/Loan (H. R. 748, SEC. 1106) – Loan Forgiveness 

  • The principal is forgiven in an amount equal to the following costs incurred during the covered period (2/15 – 6/30): payroll costs, mortgage interest associated with the business, rent, and utilities;
  • Loan Forgiveness Taxability – Any amount forgiven is excluded from gross income.

 3) Individual Tax Relief (H. R. 748, SEC. 2201)

IRC §6428 – 2020 Recovery Rebates for Individuals: Credit equal to the lesser of: (1) net income tax liability or (2) $1,200 ($2,400 MFJ); $500 for each qualified child (under §24(c)); credit reduced by 5% of the amount of AGI which exceeds $75,000 ($112,500 HoH; $150,000 MFJ); no credits for non-resident aliens dependents or trusts.

  • Rebates treated as 2019 payment;
  • No refund or credit shall be made or allowed under this subsection after December 31, 2020;
  • For those who have not filed a 2019 return, the rebates may be determined: (1) using the taxpayers’ 2018 return, OR (2) using the 2019 SSA-1099.

4) Individual Tax Relief – Retirement Plan Distributions (H. R. 748, SEC. 2202)

  • $100,000 “coronavirus-related distribution” exemption from §72(t) – 10% penalty;
  • A person: diagnosed with COVID-19; whose spouse is diagnosed with COVID-19; who experiences adverse financial consequences as a result being quarantined, furloughed, or laid off or having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated or other factors determined by the Secretary;
  • Distributions must take place in 2020;
  • Income from the distribution recognized ratably over a three year period;
  • The amount distributed can be repaid over a three year period;
  • Retirement Plan Loans: must apply within 180-days of enactment, limit increased from $50,000 to $100,000, and limit increased to 100% of the balance from 50%;
  • Temporary waiver of RMDs (H. R. 748, SEC. 2203): RMDs are generally not required in 2020, and taxpayers subject to the 5-year rule can “skip” 2020.

  5) Employee Retention Credit (H. R. 748, SEC. 2301)

  • 50% of qualified wages up to $10,000 ($5,000 credit);
  • Credit against employment taxes and is refundable; and
  • Reduced for credits in Section 7001 and 7003 of the Families First Coronavirus Response Act. 

 6) Delay of Employer Payroll Taxes (H. R. 748, SEC. 2302)

  • Payroll tax deposits delayed until the applicable date (employer-side only);
    • Applicable Date

12/31/2021: 50% of the amount due

12/31/2022: the remaining amount due

  • Exception for taxpayers which had ineptness forgiven by the SBA loan program;
  • Includes 50% of SECA taxes.

7) NOL Modification (H. R. 748, SEC. 2303)

  • 20-year carryforward NOLs before 1/1/2018;
  • Plus the lesser of: (1) all NOLs after 12/31/2017, OR (2) 80% of taxable income;
  • Denied excess business loss treated as NOL in the current taxable year for the purposes of determining carryovers (excludes losses from the sale or exchange of capital assets) – H. R. 748, SEC. 2304.

Talai Law Offices is a boutique law firm located mainly in the Los Angeles area providing estate planning and business planning legal services with tax planning in mind.  Please feel free to contact us at 818-285-2850.