Special Report – A CARES Act Update
On March 27, 2020, congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the Coronavirus pandemic that has caused worldwide economic and social turmoil. Our goal in this update is to highlight the tax and financial aspects of how this $2tn bill will affect many of our clients. As such, some information in the bill will not be expanded upon in this article and if you have any questions please contact your advisor directly to discuss.
It is important to keep in mind that the mechanics behind much of the stimulus package remain to be seen. We are not sure how compliance, reporting, and application for benefits will be handled. As more information is available in the coming weeks, we will be highlighting what we learn.
The item that has received the most media attention in the past week is the recovery rebate that will be given to any U.S. taxpayer that qualifies. In general, individuals will be entitled to $1,200 (married filing joint filers will receive $2,400). There will also be an additional $500 for every household with a child that qualifies under the Child Tax Credit rules (a child under the age of 17). Certain high-income individuals will receive no rebate. The limitations are detailed below:
If your income is above:
- Single filers: $75,000
- HOH filers: $112,500
- MFJ filers: $150,000
Then your rebate will be reduced by 5% of the income that exceeds the threshold until you are phased out completely. Because of the $500 credit per child rule, each taxpayer will have a different AGI where they are completely phased out. If you do not have any qualifying children, you would be completely phased out at the following rates:
- Single filers: $99,000
- HOH filers: $136,500
- MFJ filers: $198,000
Those who are ineligible for the rebate are nonresident alien individuals, anyone who is claimed as a dependent on another return, and estates and trusts.
The rebate is based on your 2019 Adjusted Gross Income (AGI). If you have not yet filed a 2019 tax return, the IRS will use your 2018 AGI. There is a bit of strategy in this regard, so please refer to your advisor with any questions or concerns. It is unclear what date you must file your 2019 tax return by to have the rebate calculated on your 2019 tax data versus your 2018 tax data.
It is important to note that the bill refers to the rebates as a tax credit. This means that even if your 2018/2019 income doesn’t qualify you for a $1,200/$2,400 rebate, but your 2020 income will, you can still get the credit when you file your 2020 tax return.
There is also a concern that taxpayers who qualified in 2018 and 2019 but would not qualify in 2020 may have to repay the credit. There is no language in the bill that supports this claim.
These amounts are set to be electronically deposited into the bank account listed on your 2018 or 2019 tax return. If you no longer have that account anymore, the IRS will send you a check. This, however, will take more time than the direct deposit. If you have no bank account listed on your federal return for 2018 or 2019, you will automatically receive a check. The IRS will send correspondence a few weeks
after payment is sent to tell you the exact amount that was paid and the method of payment in case there are any discrepancies.
Required Minimum Distributions (RMD’s)
There are important changes around retirement account distributions. The first big change is that RMD requirements have been waived for 2020.
If you have already taken your RMD for 2020 you can return the funds to your account and avoid the taxable distribution.
Retirement Distributions For Qualified Medical Care
The second big change is the new “Coronavirus-Related Distribution”. In order to qualify for this distribution, only one of the following must apply:
- You were diagnosed with COVID-19.
- Your spouse or your dependent was diagnosed with COVID-19.
- You experience adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced hours, unable to work due to childcare, or other factors determined by the Secretary of the Treasury.
It looks as though Congress is going to be very lenient on this last item. In effect, the Coronavirus distribution would waive the 10% early distribution penalty from your retirement account. This distribution must be made by December 31, 2020, and must not be more than $100,000.
By default, the amount will be included in gross income incrementally over 3 years unless you make an election prior to the distribution to recognize the lump sum in 2020. Note that this may be a good strategy for people who expect to have a lower income in 2020 and more income in 2021 and 2022 as life returns to normal. It is unclear how paperwork will be updated for you to make the election.
In addition, you can repay the amount that you distributed. An individual who takes a coronavirus-related distribution may, at any time during the 3-year period beginning the day after the distribution was received, as a lump sum or through multiple payments, pay back the amount that was originally distributed. This would then treat the distribution as a rollover and as such nontaxable. The taxpayer can file amended returns to receive a refund of the taxes paid on the distribution.
Retirement Plan Loan Provisions
The stimulus bill also includes new rules for loans from qualified plans.
You can take a loan from a qualified employer plan that does not exceed the greater of 50% of the present value of the account or $50,000.
The New Rules:
You can take a loan from a qualified employer plan that does not exceed the greater of the FULL present value of the account or $100,000.
In addition, repayment of loans that are already outstanding from qualified accounts has been delayed beyond December 31, 2020. If you take a loan out, as of the date of this legislation, the prior 5-year rule for repayment will be extended to 6 years.
Certain pieces of the tax legislation are permanent tax changes (or as permanent as tax code can be) that do not expire after the Coronavirus pandemic is behind us. One of those permanent changes is a new above-the-line deduction for charitable contributions. If you donate to charity in 2020, you can deduct the amount donated up to $300 regardless of whether or not you itemize. This must be a cash contribution, not a donation of items to goodwill. Contributions that were used to fund a DAF do not qualify for the above-the-line deduction.
Additionally, prior limitations on charitable contributions are waived for 2020. Typically, the charitable contribution deduction is limited to 60% of the taxpayer’s Adjusted Gross Income (AGI). The stimulus bill increases that limitation to 100% of AGI. For C Corporations, the limit has been increased from 10% to 25%. Excess contributions, as always, can be carried forward.
STUDENT LOAN RELIEF
Loan payments are suspended for Federal Loans through September 30, 2020, and will accrue no interest during this time. If you work in an industry that offers loan forgiveness after a certain amount of time, suspended months will count towards your total time in the loan forgiveness program.
The CARES Act also allows employers to make payments up to $5,250 either to employees or directly to loan providers to cover the cost of an employee’s student loan debt. This payment would be tax-free income to the employee and a full tax deduction to the employer. Note – the current provision that allows a tax-free payment to the employee and a full deduction to the employer for current educational expenses will be included with the student loan debt payment for purposes of the $5,250 limit. Therefore, if an employer pays $3,000 to an employee for current qualified educational expenses and $3,000 for the qualified student loan debt, only $5,250 is deductible to the employer and tax-free to the employee. The remaining $750 must be included in the employee’s income.
Practically speaking, if you have student loan debt and are able to afford it, we recommend using this time to take advantage of $5,250 in what is effectively tax-free income if it is used to pay down student loan debt.
For Business Owners: Schedule C and All Other Entity Types
The CARES Act has an overwhelming amount of support for small business owners. Here we will outline those that are most pertinent for our clients.
Payroll tax payment delay
Payroll taxes incurred starting the date the act was passed and ending January 1, 2021, are not due until the following dates:
- December 31, 2021, with respect to 50% of the full amount
- December 31, 2022 with respect to the remaining amount
This provision is a little confusing for Schedule C filers due to the nature of how taxes are calculated and paid by sole proprietors in the following year for the current year. Self-employed individuals only have an extension for 50% of the total employer taxes owed (so 25% of the total Social Security and Medicare taxes owed). The rest is due as normal, which is typically the filing deadline for the Form 1040 and Sch. C.
Employee Retention Credit
Probably one of the most important tax provisions in the CARES Act for businesses is the Employee Retention Credit. To qualify, a business must have existed in 2020 and had business operations either fully or partially suspended by the order of an appropriate governmental authority limiting commerce, travel, or group meetings due to the Coronavirus. The main requirement is that gross revenue in the current quarter must be less than 50% of gross revenue in that same quarter of the prior year (2019). It is important to note that once this requirement is met and the credit is “triggered”, the credit stays in effect until the earlier of:
- The end of 2020; or
- There is either a quarter without a government-required suspension of operations, or gross revenue from the current quarter exceeds 80% gross revenue from the same calendar quarter in 2019, whichever is sooner.
This credit will be up to 50% of qualified wages paid ($10,000 max) with respect to each employee. This credit goes directly toward employment taxes. If you employ less than 100 people, all wages count toward the calculation limited to the $10,000 maximum.
Net Operating Loss Carryback
The stimulus bill allows businesses to carryback NOLs that arose in 2018, 2019 and 2020 to each of the 5 taxable years preceding the taxable year of such loss. Furthermore, the NOL carryback can offset 100% of income in each of those prior years.
The Paycheck Protection Program
The paycheck protection program is an incredible boon for small businesses in the CARES Act. This is a (potentially) forgivable loan program offered through the Small Business Administration (SBA). To qualify for this loan, employers must not employ more than 500 people during the period starting March 1, 2020, and ending December 31, 2020.
The maximum amount a business can borrow will be the lesser of:
- The average total monthly payments by the applicant for payroll, rent, mortgage payments, or any other debt obligations incurred during the 1-year period before the date on which the loan is made multiplied by 2.5 (the payroll period under observation is February 15, 2019, to June 30, 2019, except for certain seasonal employers).
There will be no fees associated with receiving the loan and the interest rate will be no more than 4%. Also, the loan repayment will be deferred for at least six months but not more than one year.
The largest benefit of these loans is that they have the potential to be fully forgiven with no recognition of income on the forgiven loan amount. The amount eligible for forgiveness is the amount spent in the first eight weeks after the loan is received on:
- Payroll costs (this does not include payroll taxes or proportional wages paid to a highly compensated employee earning greater than $100,000/year).
- Rent pursuant to a lease created prior to February 15, 2020.
- Utilities for services that began prior to February 15, 2020.
- Group health insurance premiums and other employee benefits.
The eligible amount is reduced for employers that did not maintain the same number of employees from February 15, 2020, to June 30, 2020, as it did during the same period in 2019 or from January 1, 2020, to February 15, 2020. If you did not maintain the same level of employees, your eligible forgiveness amount is reduced ratably. This may make you reconsider re-hiring anyone you let go after February 15th for purposes of calculating the loan/credit.
At the time of this writing, the loan providers who disburse proceeds from SBA loans are unsure how the application process will proceed. They are waiting for additional guidance on calculating/tracking the eligible loan amount and disbursement of funds. We anticipate more clarity on this by the weekend.
Sick/Family Leave Benefits
On March 18, 2020, congress passed the Families First Coronavirus Response Act. This act required certain employers to provide paid sick leave and paid family leave for their employees. If you provided those benefits for your employees, you are eligible for a credit for the amounts paid.
The credit for sick leave and paid family leave is equal to 100% of the qualified sick leave or paid family leave wages paid by such employer with respect to such calendar quarter, limited to 10 days.
The amount cannot exceed $200 per day for each qualified individual if leave was due to:
- Employees providing care for an individual who is subject to a quarantine or isolation order.
- Employees providing care for a child because schools are closed, or childcare providers are unavailable.
The amount cannot exceed $511 per day for each qualifying individual if leave was due to:
- A federal, state, or local quarantine or isolation order related to COVID-19.
- A healthcare provider advised the employee to self-quarantine due to concerns related to COVID-19.
- The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
There are a lot of moving parts in the $2 trillion stimulus bill and it will have a significant effect on the U.S. economy, businesses, and individual taxpayers. We fully expect to see further legislation as our nation battles the COVID-19 virus. Our goal as a firm is to keep you informed and best positioned to access the benefits under the legislation which apply to your circumstances.
We are here to help you make rational, informed and well-reasoned decisions, and we thank you for your continued trust and support. Your input is always welcome, and we ask that you contact us with any questions or concerns.
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