Title II of the CARES Act (“Act”), which was signed into law on March 27, 2020, is entitled Assistance for American Workers, Families and Businesses. Its provisions are aimed at providing enhanced unemployment benefits to employers and employees, and offering targeted tax relief to individuals, businesses, and not-for-profit enterprises.
Here is an overview of Title I of the CARES Act, including the Paycheck Protection Program.
The thrust of Title II of the CARES Act is to provide employees with unemployment benefits that are larger and of longer duration than existing benefits provided under federal and state law. The provisions are also aimed at helping employers retain employees as long as possible.
Title II of the CARES Act is comprised of three subtitles:
Subtitle A provides enhanced unemployment insurance to employers and employees
Subtitle B provides targeted tax relief to individuals who have been financially harmed by the Coronavirus.
Subtitle C provides tax relief to employers. Most of these provisions are simply amendments to the 2017 tax relief legislation, and have little to do with the Coronavirus.
Subtitle A – Unemployment Insurance Provisions
Pandemic Unemployment Assistance
The Secretary of Labor is authorized to provide pandemic unemployment assistance for up to 39 weeks to workers who meet certain criteria, including:
(1) They’re not eligible for other federal or state unemployment insurance or pandemic emergency unemployment compensation;
(2) they’re unemployed, partially unemployed, or unable to work as a direct (i.e., ill with Covid-19) or indirect (i.e., caring for family member with Covid-19) result of the Coronavirus;
(3) they cannot telework;
(4) they’re not receiving other paid leave; and
(5) they meet additional as yet undefined criteria established by the Secretary of Labor for unemployment assistance. The assistance payments are available retroactively from January 27, 2020, through December 31, 2020, for as long as the individual’s unemployment, partial employment or inability to work due to Covid-19 continues. The 39 week maximum benefit period can be extended for any period Congress chooses to do so in future legislation.
The amount of pandemic unemployment assistance provided under the legislation is the
(1) the weekly benefit authorized under a state’s law (which can be no less than the weekly federal minimum) plus
(2) the federal pandemic unemployment compensation of $600 per week plus
(3) any increase in the weekly benefit after enactment of this Act.
The additional $600 pandemic benefit only runs through July 31, 2020, in states that have entered into an agreement with Department of Labor to administer the program. The additional $600 benefit is not available in states that reduce the maximum duration or average weekly benefit amounts provided under their regular unemployment compensation programs that were in effect on January 1, 2020. The amount of federal pandemic unemployment compensation paid to a person can’t be considered when calculating that person’s income for Medicaid and CHIP benefits.
Regardless of state law, the assistance provided to individuals under the Act must be made without the 7-day waiting period. This includes states like California. The federal government will pay or reimburse 100 percent of the funding required by states to provide immediate assistance under the legislation, and the Secretary will provide states with additional funds to process applications and administer the program. The Secretary will also issue guidance to the states allowing them to interpret state unemployment compensation laws in a manner that provides maximum flexibility in the reimbursement of employers.
The legislation allows the Secretary to enter into an agreement with any state that wishes to provide 13 additional weeks of pandemic emergency unemployment compensation to individuals who
(1) have exhausted their rights to regular unemployment compensation under state or federal law,
(2) have no rights to such compensation, and
(3) are able, available, and actively seeking work.
The amount of this additional benefit is computed by adding the (1) weekly benefit authorized under a state’s law, and (2) the extra federal pandemic unemployment compensation of $600 per week. To qualify to receive this additional money a state cannot reduce the weekly unemployment benefits it would otherwise provide to individuals residing in that state. The federal government will pay to each state that signs up for this emergency program 100 percent of the emergency unemployment compensation, and provide states additional funds to administer the emergency program under each federal-state agreement.
States Work Share Unemployment Benefit Programs
The legislation provides appropriations to temporarily reimburse states for making Short-Time Compensation (“STC” or “work sharing”) payments under existing or new STC programs for those weeks of unemployment that begin with enactment of the Act, and end on or before December 31, 2020. The program provides prorated unemployment compensation to workers whose hours have been reduced in lieu of a layoff. A state that doesn’t currently have such a program under its laws can enter into an agreement with the Secretary of Labor to provide STC benefits to qualified individuals for up to 26 weeks during a benefit year. Half the cost of these benefits must be paid by the employer and the other half will be paid by the federal government, which will also provide states with funds to cover the costs of administering the program.
The legislation also establishes a grant program to promote STC programs nationwide. The Department of Labor will award grants to states to implement and improve the administration of their STC programs, and promote and enroll additional employers into the programs. One-third of a state’s grant can be used for implementation and two-thirds can be used for promotion of and enrollment in the program. All state grant applications must be submitted before December 31, 2023. If a state applies for and receives an STC grant, but fails to implement and administer a program properly, the federal government can recoup the grant funds from the state.
To help states create and implement STC programs, the Secretary of Labor will develop model legislation that states can use to enact a program in their jurisdictions. The Secretary will provide technical assistance and guidance on how to develop, enact and implement the program, and will consult with employers, unions, state work force agencies, and other stakeholders in doing so. The Secretary will also establish reporting requirements to ensure states collect and manage information needed to successfully implement an STC program in each state.
Railroad Unemployment Insurance Benefit Programs
The legislation waives the 7-day waiting period to provide unemployment benefits under the Railroad Unemployment Insurance Act (“RUIA”). It appropriates an additional $50,000,000 to reimburse the states to cover the costs of these additional benefits. The legislation also appropriates an additional $425,000,000 to fund an additional RUIA benefit of $1,200 for each employee who qualifies from April 1 to July 31, 2020, regardless of other RUIA benefits the employee may have received during this time or any limits on the employee’s overall benefits. The legislation reauthorizes the temporary increase of extended RUIA benefits to employees who received regular RUIA benefits between July 1, 2019 and June 30, 2020. Those benefits end as of December 31, 2020. The Act appropriates $25,000,000 for the Department of Labor’s Inspector General to conduct oversight of the program’s use of the funds.
Subtitle B – Changes to Individual Tax Provisions
Subtitle B amends the U.S. Internal Revenue Code to provide taxpayers with an assortment of tax benefits to compensate them for financial losses caused by the Coronavirus.
Refundable Income Tax Credit
The legislation provides individual taxpayers with a refundable income tax credit of $1,200 per person, and $2,400 for married couples filing a joint return. It also provides a $500 credit for each qualifying child of the taxpayer. The credit is phased out for individual taxpayers with adjusted gross incomes over $75,000 and joint filers over $150,000. To be eligible for the credit, taxpayers must include valid identification numbers (e.g., SSNs) on their tax returns.
Distributions from Tax Exempt Retirement Plans
The legislation permits penalty-free distributions from tax-exempt retirement plans of up to $100,000 in a taxable year because of the Coronavirus. The Act also allows loans of up to $100,000 from such plans, with delayed repayment requirements. A coronavirus-related distribution is defined as any distributions from an eligible retirement plan made between January 1, 2020 and December 31, 2020, to an individual who is (1) diagnosed with the virus SARS-CoV-2, (2) whose spouse or dependent is diagnosed with such virus or disease, or (3) who has experienced adverse financial consequences from being quarantined, furloughed, or laid off from work due to such virus or disease. Individuals who receive coronavirus-related distributions may pay back their retirement plans without any adverse tax consequences. Any amounts of such distributions that must be included in gross income for any taxable year, can be spread ratably over three taxable years. The legislation provides a temporary waiver of required minimum distributions from retirement plans and accounts in 2020.
Charitable Contributions
The legislation allows a tax deduction for charitable contributions made in 2020 of up to $300 for taxpayers who do not itemize their tax deductions. It also suspends the limitation on cash contributions made by individuals and corporations for purposes of the charitable contribution tax deduction in 2020.
Student Loan Payments
The legislation allows employees to exclude from their income any employer payments of the employee’s student loans made before January 1, 2021. These payments would otherwise be categorized as income to the employee for tax purposes.
Subtitle C – Changes to Business Tax Provisions
Subtitle C amends the U.S. Internal Revenue Code to provide certain employers tax credits and other tax benefits to compensate them for financial losses due to the Coronavirus. In reality, many of these provisions have nothing to do with ameliorating the adverse health and economic effects of the Coronavirus. They’re simply amendments to the 2017 federal tax cuts that further enhance the tax benefits to favored classes of taxpayers.
Employer Retention Tax Credit & Deferred Payment of Payroll Taxes
The legislation gives employers the ability to accept if they so choose a payroll tax credit in an amount equal to 50 percent of the qualified wages paid to each of its employees, up to $10,000 per employee. Eligible employers include businesses or not-for-profit enterprises that are carrying on a business or trade in 2020 that is partially or completely closed because of a government order limiting commerce, business travel or meetings due to the Coronavirus. The tax credit applies in the first calendar quarter after December 31, 2019, in which gross receipts are less than 50 percent of gross receipts for the same quarter in the prior year. It ends in a subsequent calendar quarter when gross receipts are more than 80 percent of gross receipts for the same quarter in the prior year. The credit appears to apply only to wages paid after March 12, 2020, and before January 1, 2021, though this may require further clarification by Congress in future legislation. The credit does not apply to the federal government or any state or local government employer.
Taxes that would have otherwise been collected if this credit were not enacted will be replaced in specific Social Security trust funds with monies from the general fund of the Treasury. An eligible employer who receives a covered loan under section 7(a) of the Small Business Act, as added by section 1102 of the CARES Act, is not eligible for this tax credit.
The legislation allows employers to defer payment of employer payroll taxes. 50 percent of payroll taxes otherwise due by the end of 2020 need not be paid until December 2021. The remaining amount of deferred payroll taxes need not be paid until December 2022. Congress has appropriated from the general fund of the Treasury additional monies to replace the funds that would otherwise be paid into various Social Security trust funds but for the deferred payment allowed by this amendment.
Modifications to Net Operating Loss Rules & Other Targeted Tax Provisions
The legislation modifies the tax rules pertaining to net operating losses to allow taxpayers to carry back net operating losses incurred in 2018, 2019 and 2020 for up to five taxable years preceding the taxable year in which such losses occurred, and to offset 100 percent of the taxpayers income with losses in taxable years beginning before 2021. The legislation also establishes special rules for carrying back net operating losses for REITs and life insurance companies. The complexity of these rules requires consultation with tax counsel, and are not addressed in their entirety in this blog.
The legislation contains several technical amendments to the Code that benefit specific sectors of the economy. You should think of these provisions as amendments to the Code advocated by various special interests working in Washington, including the real estate industry. For instance, the legislation repeals the $250,000 limitation on the net business losses of taxpayers other than corporations for 2018 and 2019, and appears to be targeted to farmers. The legislation allows a corporate taxpayer to file an application with the Treasury under the alternative minimum tax provisions of the Code to request an immediate credit or refund of AMT paid in 2018 or owed in 2019. Within 90 days of receipt, Treasury must review the application and determine the amount, if any, of overpayment, and apply, credit or refund the overpayment to the taxpayer. The legislation increases to 50 percent the limit on the deductibility of business interest for taxable years beginning in 2019 and 2020. The legislation amends the 2017 tax cuts approved by the President by classifying qualified improvement property – defined as interior improvements to non-residential property – as 15-year property for depreciation purposes. Another gift to the commercial real estate industry. Finally, the legislation suspends the excise tax through 2020, on alcohol used in hand sanitizer.