Published 04/02/2020
Updated April 9, 2020
Last week, the U.S. government signed into law the largest
economic stimulus bill in our country’s history in response to the effects of the coronavirus.
The more than $2 trillion relief package, the Coronavirus Aid, Relief, and
Economic Security Act, or CARES Act, is aimed at directly and indirectly
alleviating the economic impacts to businesses, families and individuals. The
intention of this stimulus is to support those sectors of the economy hardest
hit (health care, education, airlines) as well as small businesses and
individuals.
There is a lot to unpack! We have attempted to distill the
CARES Act into a digestible format, so you can read about what is applicable to
your personal situation. We are not covering every detail of the legislation,
so this is not an all-inclusive summary.
PART 1: Highly Relevant Federal Stimulus Benefits for Retirees and Business Owners
·
Required Minimum Distributions Waived for 2020
·
Small Business Forgivable Payroll Loan
PART 2: Programs for Individuals
·
$1,200 Recovery Rebate
·
Increased Unemployment Benefits for Those Who Become
Unemployed or Furloughed
·
Penalty-Free Access to Retirement Account Assets
·
Federal Student Loan Payments Suspended Through
September 30, 2020
·
Increase of AGI Limit for Charitable
Contributions to 100%
PART 3: Programs for Businesses
·
Employee Retention Tax Credit for Employers Who
Closed or Lost > 50% of Revenue
·
Delay of Payroll Tax Payments (For Those Not Receiving
a Forgivable Payroll Loan)
·
Net Operating Loss (NOL) Changes
Fasten your seat belts, here we go!
Required Minimum Distributions Waived for 2020
The CARES Act amends legislation to suspend required minimum
distributions (RMDs) during 2020.
Our Advice:
The suspension applies to traditional IRAs, SEP IRAs, SIMPLE
IRAs, 401(k), 403(b) and governmental 457(b) plans for both retirement account
owners and inherited IRAs. It includes any 2019 RMDs due by April 1,
2020, as well as their 2020 RMD this calendar year.
Small Business Forgivable Payroll Loan
While technically loans, the portion used directly for
payroll and other qualifying expenses may be forgiven. It is a stimulus to
encourage small businesses to keep employees employed.
Our Advice:
WHAT? The biggest advantage of the Paycheck Protection Program Loans is the eligibility for the loan to be forgiven on a tax-free basis. The amount of forgiveness will generally equal the amount spent on payroll costs for employees (capped at $100,000 annual salary per employee), mortgage interest, rent and certain utility payments. Not more than 25% of the amount forgiven may be for non-payroll costs.
HOW TO APPLY? Please contact your bank or SBA lender
for more details on this program. To seek forgiveness, the business must submit
an application documenting the proceeds went to eligible expenses. Lenders must make decisions on forgiveness within 60 days of submitting the application and documentation.
WHO? Eligible businesses, including sole proprietorships, independent contractors and those self-employed, that have fewer than 500 employees (including affiliated businesses) can
receive this relief and are required to make a good-faith certification that
the loan is needed based on the economic environment caused by the coronavirus.
HOW MUCH? Businesses can generally borrow up to 2.5 times their average monthly payroll costs over the past 12 months. Payroll costs include wages, salary, cash tips, payments for vacation and sick leave, group health benefits, employer contribution to retirement plans, state and local taxes assessed on compensation and FICA (for employee's portion). Payroll costs do not include employee salaries of above $100,000, salaries of employees who reside outside of the United States, payroll taxes or payments for qualified sick leave or family medical leave for which the business received a credit. The maximum amount that can be borrowed by an eligible business is $10 million, with an interest rate of 1% on a two-year term.
OTHER DETAILS: The eligible business must have been in operation as of February 15, 2020 and must have had employees for which the business paid salaries and payroll tax. Proceeds from the loan must cover payroll, mortgage interest payments, rent, utilities, and interest payments on other debts incurred prior to February 15, 2020. No collateral is required. The amount forgiven can decrease if there is a reduction in the average number of employees during the eight-week period after the date of the loan, or if the salaries or wages for any employee are reduced by 25% or more during the period. Protections are given to businesses that lay off workers, furlough workers or reduce salary or wages between February 15, 2020 and April 26, 2020, as long as the business rehires workers prior to June 30, 2020 or restores compensation.
Small businesses and private nonprofits affected by the
coronavirus can receive an emergency advance grant of up to $10,000 within days of successfully applying for the Economic Injury Disaster Loan (EIDL). You do
have to request the grant after you first apply for EIDL, and these advance
grants do not need to be repaid if you are subsequently approved for the EIDL. Businesses
that have received an EIDL and/or an advance grant between January 31, 2020 and
June 30, 2020 can still apply to receive a Paycheck Protection Program Loan.
You cannot cover the same expenses with each loan and any advance amount
received would be subtracted from the amount forgiven as your Paycheck
Protection Program Loan.
For more information:
U.S.
Chamber of Commerce – Coronavirus Emergency Loans Small Business Guide and
Checklist
U.S. Treasury
– PPP Information Sheet
The official Frequently Asked Questions document can be found at
this link:
Treasury FAQ about the Paycheck Protection Program
$1,200 Recovery Rebate
The CARES Act provides a payment up to $1,200 for each adult
and $500 for each child under 17. The exact amount of payment will be based on
information from your 2019 tax return if filed, or from your 2018 return. If
you have not filed a return in either year (may not have had enough taxable
income to require filing), eligibility will be determined based on your Social
Security Benefit Statement (Form SSA-1099) if receiving Social Security
payments. Those on other government assistance programs will likely receive
their checks through the program.
The payments begin to phase out at certain income thresholds. For individuals, the phase-out threshold begins for those earning more than $75,000 annually. For married filing jointly taxpayers, the threshold begins for those earning more than $150,000 annually. For every $100 a taxpayer’s income exceeds the phase-out threshold, the rebate payment is reduced by $5. Payments completely phase out at $99,000 for single individuals or $198,000 for married filing jointly taxpayers with no children. The chart below illustrates the proposed rebate payments and their phase out for multiple taxpayer groups.
Unfortunately, those individuals
who were high earners in 2018 or 2019 but have since been laid off, furloughed
or saw incomes decrease in 2020 for other reasons may not receive a payment and
would not benefit from the rebate until they file their 2020 tax return. If you
have yet to file your tax return for 2019 and you earned more income versus
2018, you may be better off receiving a rebate that is calculated based on your
2018 income. The tax filing deadline has been extended by the IRS from April
15, 2020 to July 15, 2020.
Others who are completely phased
out of a payment include students who are dependents on a parent’s return or
seniors who are claimed as a dependent on an adult child’s return. The payments
are not linked to any tax liability you or your household may owe and there is
no minimum amount of qualifying income to receive the payment.
Payments could be issued within
three weeks. In many cases, payments will be paid electronically via direct
deposit with the information provided to the IRS on your 2018 or 2019 tax
returns. The payments that will be made to non-direct-deposit refunded tax
return individuals or families may be received as paper checks mailed to the
filing address, although the Treasury plans to develop a web portal to provide direct deposit banking information to the IRS online. The payments are not considered taxable income, however, it is
important to note that the payments act as an advance payment of a credit on
your 2020 tax return.
A summary of the direct payments
can be found at the link below:
CongressionalResearch Service: COVID-19 and Direct Payments to Individuals
Increased Unemployment Benefits for Those Who Become
Unemployed or Furloughed
Benefits are enhanced for those filing for unemployment.
Regular unemployment payments will be increased $600 weekly for four months
through July 31, 2020 and eligibility to file for unemployment is extended to
those previously ineligible, including part-time employees, freelancers,
independent contractors, gig-economy workers and those self-employed. These
benefits, which typically run out after six months in most states, will be
extended for an additional 13 weeks or for an additional quarter.
Those receiving unemployment income should be reminded to
have taxes taken out given this is considered taxable income. The CARES Act
also waives the one-week waiting period, so those who file for unemployment may
receive benefits available in the first week they are unemployed. You may qualify
for unemployment if your wages have been reduced and not totally eliminated.
For more information on how to file for unemployment in your
state and to see your state’s unemployment insurance program, see the link
below:
CareerOneStop
(Sponsored by the U.S. Department of Labor, Employment and Training
Administration
Penalty-Free Access to Retirement Account Assets
The CARES
Act both allows penalty-free early distributions and expanded loan amounts.
The CARES
Act allows for individuals under the age of 59½ who have been directly affected
by the coronavirus to access their retirement accounts, without the usual 10%
early withdrawal penalty for up to $100,000 of retirement funds. However, you
would still owe income taxes on the amount withdrawn at your ordinary income
tax bracket. The distributions can be repaid over three years, and default
taxes are spread evenly over 2020, 2021 and 2022.
For those
individuals who have been especially affected by the coronavirus, the CARES Act
expands the maximum loan amount from $50,000 to $100,000 for employer-sponsored
retirement accounts. The CARES Act further amends the vested balance that may
be used from 50% to 100% of the balance, up to $100,000. Payments owed on the
loan may be delayed for up to one year.
Our Advice:
Federal Student Loan Payments Suspended Through
September 30, 2020
The CARES Act will suspend required payments on federal
student loans from March 13, 2020 through September 30, 2020 and no interest will accrue on the
loans during this time. It is important to note that voluntary payments are not
prohibited. Automatic payments will be suspended during this period and any borrower whose automatic payment was processed after March 13, 2020 can contact their loan servicer for a refund. Borrowers can contact their loan servicer if they would like to opt out of the suspension and continue automatic payments. This suspension of
payments does not apply to other programs like FFEL loans, Perkins loans and
private student loans.
It is important to note that if working toward qualifying
for any of the loan forgiveness programs, payments made over this time will
continue to count. Because of this, it may be prudent to pause payments
during this window of relief through September 30. The borrower ultimately
looking to have their borrowing forgiven would effectively be paying 0%
interest debt during this time.
The CARES Act provides relief to student loan borrowers and
there are exclusions for employer payments of student loans. If an employer
pays student loans on your behalf, it is normally considered taxable income
when filing your tax return. The CARES Act will allow your employer to pay up
to $5,250 of your student loans on a tax-free basis in 2020. This amount is
combined with the regular $5,250 limit employers can pay to provide for current
education assistance, thus the $5,250 for 2020 is the maximum tax-free
assistance.
Increase of AGI Limit for Charitable Contributions to
100%
Those looking to make qualified cash charitable
contributions can completely eliminate their 2020 tax liability. The CARES Act
temporarily increases the adjustable gross income (AGI) limit on cash
contributions made to charities from 60% of AGI to 100% of AGI for qualified
contributions. Any excess contributions above the 100% limit of your 2020 AGI
can be carried forward as charitable contributions for up to five years. The
CARES Act prohibits contributions from funding donor-advised funds (DAFs) or
509(a)(3) supporting organizations. There is also a new charitable contribution
deduction available for those who do not itemize to deduct up to $300 in 2020.
Employee Retention Tax Credit for Employers Who Closed or
Lost > 50% of Revenue
Employers are eligible if operations
were fully or partially suspended due to the coronavirus related shut-down
order from an appropriate governmental authority or if gross revenue in
2020 has less than 50% of the revenue from the same quarter in 2019.
Eligibility for the credit will continue
until the earlier of:
The credit is equal to 50% of the qualified wages paid to
each employee, up to a maximum of $10,000 of wages per employee from March 13,
2020 through December 31, 2020. Qualified wages include wages and health
benefits paid to eligible employees. The relief does not apply to employers
who receive certain SBA loans under the CARES Act.
For businesses with 100 employees or fewer: All wages
are eligible to count toward the credit, whether the business remains open or
subject to a suspension order (subject to the reduction in gross revenues).
For businesses with more than 100 employees: Only
wages paid to individuals who are not providing services during a
government-required suspension of operations or because business revenue has
declined are eligible to count toward the credit.
For more information:
IRS
FAQs: Employee Retention Credit under the CARES Act
Delay of Payroll Tax Payments (For Those Not Receiving a
Forgivable Payroll Loan)
Employers can delay payment of the employer’s share of the
6.2% Social Security (OASDI) portion of payroll taxes related to calendar year
2020 until 2021 and 2022. That means 50% of the payroll taxes that would
otherwise be due during 2020 may be deferred until December 31, 2021 and the
remaining 50% is due on December 31, 2022.
This relief applies to self-employed individuals as well
with respect to the “employer equivalent” portion of their self-employment
taxes. The deferral period for payroll begins on March 27, 2020 through
December 31, 2020. The relief does not apply to employers who have debt
forgiven under the CARES Act for certain SBA loans.
Net Operating Loss
(NOL) Changes
The CARES Act amends the Tax Cuts and Jobs Act limits on NOL
deductions for corporations (does not include REITs). The amendment allows NOLs
incurred in 2018, 2019 and 2020 to be 100% deductible, without the 80%
limitation, and losses incurred in the same periods are allowed to be carried
back five years to claim refunds of taxes paid in prior years.
For more information for small businesses surrounding the
Paycheck Protection Program Loans, Employee Retention Tax Credit, Deferred
Payroll Taxes, as well as other helpful provisions, see the link below:
U.S.Senate Committee on Small Business & Entrepreneurship: The Small BusinessOwner’s Guide to the CARES Act
Sources
Used for Reference
Coronavirus Aid, Relief, and Economic Security Act, S.3548, 116th Congress (2020).
"Factbox: What's in the $2.2 Trillion Senate Coronavirus Rescue Package." Reuters.com, March 26, 2020.
Larry Katzenstein, Jackie Dimmitt, Steve Gorin and Rick Lawton, “CARES Act Implications for Charitable Giving During COVID-19.” Thompson Coburn LLP, March 31, 2020.
"SBA Loans Under the CARES Act - Updated." The National Law Review, April 7, 2020.
Tony Nitti, "Congress Reaches Agreement on a
Coronavirus Relief Package: Tax Aspcts of the CARES Act." Forbes.com,
March 25, 2020.
All information is believed to be from reliable sources, however, its accuracy and completeness and the opinions based thereon by the author are not guaranteed and no responsibility is assumed for errors and omissions. Any economic and performance data published herein is historical and not indicative of future results.
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