Ever since the enactment of the CARES Act, everyone’s attention has been focused on the direct payments to individuals ($1,200 payment per individual, releasing the week of April 13) and the Paycheck Protection Program (PPP) whose funds are scheduled to end the same week. The law is actually 880 pages long and has a lot more benefits and programs that are not getting as much attention. In this post I’ll break down the other important areas of the CARES Act.
Stimulus Checks Are Just an Estimate of the 2020 Available Credit
There has been a ton of press regarding the $1,200 checks–who is getting checks, when will the checks arrive, and how much individuals will get. The problem is that while these checks are sorely needed, they are simply an advance on a tax credit located on your 2020 taxes. That means that you could receive the maximum $1,200 check because you made less than $75,000 in 2019, but then if you make over $75,000 in 2020 this would technically require you to “pay back” the credit that is no longer due. The law is split on whether or not taxpayers are required to pay back the difference. The house bill explicitly says that no repayment is required, the senate bill and final bill are silent on the subject. Like everything else in the CARES Act, we will need to wait until we see the final regulations to have certainty on the matter.
Tax Credits Are Available if You Don’t Receive a Paycheck Protection Program Loan
The press has paid so much attention to the Paycheck Protection Program (PPP) loan (the difficulty in applying for the loan, the available fixed amount, the deadline to get the applications in) but there are employer tax credits that are only available if you DON’T receive a PPP loan. The CARES Act created the Employee Retention Credit. It is a fully refundable tax credit equal to 50% of qualified wages (including health plan expenses) up to a maximum of $5,000 per employee. This credit applies to qualified wages paid after March 12, 2020 and before January 1, 2021. The maximum credit is $5,000 (based upon the employee earning $10,000). Employers who qualify need to have been in business during 2020 and either:
- Fully or partially suspended operations during any quarter in 2020 due to orders from the appropriate government authority OR
- Experienced a significant decline in sales during a calendar quarter
The credit is calculated on the employer’s 941 payroll tax return. The tax return will reconcile the payroll taxes due and the credit earned by paying wages. For employers under 100 employees, the credit is based upon wages paid to all employees whether or not they worked in the quarter. If the employer had 100 employees in 2019, then the credit is based upon the wages paid to the employee who worked in the quarter.
Net Operating Loss Rules Have Changed
The Tax Cuts and Jobs Act (TCJA) changed the net operating loss rules to only allow for the carry forward of losses. The CARES Act changed the Net Operating Loss (NOL) rules in three significant ways:
- Provided for a five-year carryback for losses earned in 2018-2020
- Suspended the NOL limit of 80 percent of taxable income. This means that companies can use their NOLS to eliminate any taxable income in a given year
- Pass-through business owners can now use the NOL to offset their non-business income
The goal was to get funds into taxpayer hands quickly. With all of these changes, it is now possible to carry back losses to 2018-2020. This would require an amended tax return of the business and maybe even the shareholder, so check with your tax provider to see if it is worth it to amend your tax return.
Student Loan Deferrals and Interest
Student loans owned by the federal government now have automatic suspension of principal and interest until September 30, 2020. The interest rate is set to zero so you will not accrue additional interest during that period. The student loan servicer will automatically suspend the payments without any action from the borrower (you do not need to call them). In fact, if you made a payment after March 13, you can ask for a refund.
Private student lenders (Federal Family Education Loan-FFEL and Perkins loans held by the school) may suspend interest and payments but they are not under an obligation to do so.
Home Mortgage Forbearance
The CARES Act also created a program for federally-backed mortgages. Borrowers of these mortgages can ask for a 180-day forbearance and if you are still in economic difficulty, you can ask for another 180-day forbearance. Keep in mind that the payments are still due, they are just delayed until the economy starts moving again. If you ask for forbearance, the servicer cannot report that on your credit report. Private mortgage holders may offer forbearance, so it is worth asking for help if you need it.
Have questions? Contact Mary Brettmann