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The CARES Act 2.0
Please note that the information below is subject to change at any time by further guidance from the IRS and Treasury or further legislation from Congress. The content provided herein is based on our interpretation of the CARES Act and is not intended to be legal advice or provide a tax opinion. This document is a summary only and not meant to represent all provisions within the CARES Act.
This year has without a doubt been a rollercoaster of emotions (and tax law). A lot has changed since our initial blog post on the CARES Act that was signed into law on March 27, 2020. We had additional relief and guidance in July and now Congress has officially signed into law a CARES Act 2.0 (at least this is our nickname for it). This piece is a very brief overview of the new items in the bill as well as updates to existing items that deal solely with the stimulus items for Americans. For a more in-depth review please click on the links below as the information contained in this piece is primarily from two trusted resources and these resources will be updated as guidance is released.
What’s NEW?
- A second stimulus check of $600 per qualifying taxpayer and qualifying child.
- This new stimulus check is extremely similar to the initial stimulus check. The same income limitations apply and children only qualify if they are under the age of 17. The major difference is that the phaseout for income hits a little earlier because the check is smaller. The $600 will be reduced $5 for every $100 your income exceeds the below thresholds.
- The stimulus check AGI thresholds are:
- Single: $75,000
- Married Filing Joint: $150,000
- Head of Household: $112,500
- The income limitations are based on your 2019 tax return. If you are a non-filer you have the ability to claim the stimulus check online at irs.gov. If you do not qualify based on your income in 2019, but will qualify in 2020, you will still be able to receive the credit when you file your 2020 tax return.
- The Paycheck Protection Program Part 2 (PPP2)
- Anyone who did not receive a loan under the original PPP will have the chance to apply under the old program (see The Original Paycheck Protection Program below).
- Anyone who did receive a loan under the original PPP that still needs additional capital may be able to receive a second loan under PPP2. PPP2 has more stringent qualifications:
- You must have received a loan from the original Paycheck Protection Program and already spent those funds.
- You must have no more than 300 employees.
- Your business must have experienced a drop in revenue of more than 25% in any quarter in 2020 as compared to 2019.
- There are special rules for businesses that were operating by February 15, 2020 but did not exist for all of 2019.
- The maximum loan amount is capped at $2 million
- As a note – everything that will be discussed in the Original Paycheck Protection Program section below applies to the PPP2 loan program as well.
What’s CHANGED?
- The Emergency Injury Disaster Loan Advance
- Remember the EIDL Advance that was being passed out like candy until it was quickly reined in? The maximum amount a company could receive was $10,000 and was limited by the number of employees you had on payroll. The CARES Act 2.0 states that the EIDL Advance will no longer be taxable and the expenses paid with the advance will still be deductible.
- The Original Paycheck Protection Program (PPP)
- The biggest (and most satisfying) change to the PPP is that the permitted costs paid with PPP funds will now be deductible. This means that forgiven PPP funds (as well as PPP2 funds) will not be taxed as income and will not be used to reduce expenses, making it virtually free money.
- As a note, California has yet to conform to the Federal tax treatment. This is something we will have our eye on in the coming months.
- In addition, loans under $150,000 will receive streamlined forgiveness. The new bill requires the SBA create a new forgiveness certification that is no longer than one page. In addition, these borrowers will not be required submit substantiating documents when they apply for forgiveness.
- The PPP also added new permitted costs that the funds can be used to cover. Those costs include:
- Covered Operations Expenditures
- Covered Property Damage Costs
- Covered Supplier Costs
- Covered Worker Protection Expenditures
- As a reminder, 60% of the total PPP loan must have been used for permitted Payroll Costs (yeah, that stipulation did not go away).
- Good news: expenses related to group life insurance, group disability, vision, and group dental insurance all count towards Payroll Costs.
- If you returned the borrow funds initially due to uncertainty of the rules, you can reapply for the original PPP.
- The covered period for all borrowers is now either 8 weeks, 24 weeks, or any timeframe in between as decided by the borrower.
- The biggest (and most satisfying) change to the PPP is that the permitted costs paid with PPP funds will now be deductible. This means that forgiven PPP funds (as well as PPP2 funds) will not be taxed as income and will not be used to reduce expenses, making it virtually free money.
- Extended Unemployment Benefits
- The federally subsidized portion of state unemployment will now be extended an additional 11 weeks (this means your state benefit will be extended 11 weeks).
- Pandemic Unemployment Assistance (the program used to pay individuals who historically would not have qualified for unemployment benefits) has been extended 11 weeks.
- An additional $300/week will be added to unemployment insurance for an additional 11 weeks (very similar to the $600/week additional unemployment in the last CARES Act).
- Employee Retention Credit
- Originally, we did not spend much time covering the ERC since those who received PPP funds were excluded from qualifying for the credit. CARES 2.0 changes this so that individuals who received PPP funds are now allowed to qualify for the ERC as long as any wages for which the credit is computed will not be treated as forgivable payroll costs for purposes of the PPP loan forgiveness (meaning you can’t double dip).
- In addition, the credit is available in 2020 and through July 1, 2021.
- The credit is equal to:
- For 2020, 50% of the first $10,000 in qualified wages per employee assuming the business experienced a 50% decrease in gross income in that quarter compared to the same quarter in 2019.
- For 2021 the parameters are a bit different – the credit is 70% of the first $10,000 per employee per quarter (rather than per year) in qualified wages assuming the business experienced a 20% decrease in gross income in that quarter compared to the same quarter in 2019.
- Certain meal expenses are 100% deductible for 2021 and 2022 (not retroactively for 2020). The deduction is only allowed for “for food or beverages provided by a restaurant” (emphasis added).
Individual Tax Benefits
- CARES Act 2.0 permanently restores the medical expense deduction limitation to 7.5% of AGI.
- The Tuition and Fees deduction (an above-the-line deduction) is set to expire at the end of 2020. In its place is a new and improved Lifetime Learning Credit. The current income phaseout for the Lifetime Learning credit is $40,000 to $50,000 for single filers and $80,000 to $200,000 for joint filers. Beginning in 2021, the new income phaseouts will be $80,000 to $90,000 for single filers and $160,000 to $180,000 for joint filers. The maximum credit you can receive is $2,000.
- Charitable contribution deductions may now be taken above the line for 2020 AND 2021. The amount in 2020 is $300 (regardless of filing status) and the amount in 2021 is $300 for single filers and $600 for joint filers.
- Ability for an employer to provide up to $5,250 of annual tax-free education assistance used to pay the principal or interest on an employee’s qualified student debt is extended through 2025 (originally the amount could only be used for current education expenses rather than student loan debt).
- Energy Credits have been extended. Originally the energy credit for installing solar was reduced to 26% of the purchase price in 2020, falling to 22% in 2021 and being completely phased out in 2022. The CARES Act 2.0 extends the 26% credit through 2022. The assumption is that the credit will then be reduced to 22% in 2023 and be officially phased out in 2024.
- If you receive debt forgiveness due to a short sale on your primary residence, that debt will not be includable as income through 2025. The maximum amount of debt that can be discharged is $750,000 for joint filers and $375,000 for single filers.
- If you had a Dependent Care FSA or a Health FSA, typically you forfeit the leftover amounts in your FSA if you do not use up by the end of the year. The act, however, allows individuals to roll forward up to $550 to use in 2021. You will need to speak to your employer about this one.
- Student loan interest rates remain at 0% until January 31, 2021.
We know this is a lot to digest – the bill itself is about 5,000 pages and these are just the highlights. We are continuing to educate ourselves on the legislation in order to better serve you. If you have any specific questions regarding the CARES Act 2.0 please do not hesitate to reach out.
Wishing you all a happy, healthy, and prosperous 2021.