In response to the unfolding COVID-19 global pandemic (as the US this week surpassed China as the country with the most confirmed cases in the world), the President has signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion emergency fiscal stimulus package, in order to help ease the effects of the resulting economic damage. It includes a wide range of provisions for both loans and outright rebate payments or tax credits aimed at helping individuals, businesses, healthcare entities, and state and local governments meet short-term cashflow demands.
In order to best serve our clients we are pouring over the data to determine what planning opportunities there may be for those we serve. The most notable provision in the bill is the direct payments to taxpayers. Specifically, individuals who had up to $75,000 in adjusted gross income in 2019 (or 2018 if you have not filed your 2019 return yet) will receive a onetime payment of $1,200, while married couples with AGI up to $150,000 will get $2,400. Additionally, taxpayers will receive an additional $500 for each qualified child, while individuals and families with income above their respective thresholds will see their relief payments reduced by $50 for every $1,000 in AGI.
For many these recovery payments cannot come soon enough. Unfortunately, it’s likely to be at least a month, if not more before such payments will actually be received. The CARES Act requires that these payments be made as soon as possible, but early indications from the Treasury Department are that “as soon as possible” may not be until sometime in May. As for where the Recovery Rebate payments will be made, it depends. It appears that individuals receiving Social Security benefits will receive their Recovery Rebate in the same account they receive their Social Security benefits. The CARES Act also authorizes Recovery Rebate payments to be made to the account into which a taxpayer’s 2018/2019 refund was deposited. Other payments will be sent to the last known address on file.
Two specific areas we are focusing on as a result of this law are in the area of retirement planning and the benefits to small business owners.
Retirement Planning changes include:
- The elimination of the 10% early withdrawal penalty on up to $100,000 in distributions from retirement accounts for so-called “Coronavirus-Related Distributions” (with the option to spread income taxation over three years, and the ability to recontribute back to those same accounts to make up in the future)
- The suspension of required minimum distributions (RMDs) in 2020 for a wide variety of retirement account (for both account owners as well as beneficiaries) as well as the ability to return current year distributions that have already been taken (except beneficiaries cannot return their distributions)
- Enhancements have been made for 401(k) loans including increasing the maximum loan amount from $50,000 to $100,000, 100% of vested balance can be borrowed instead of 50%, and any payments for existing loans through the end of 2020 may be delayed for up to one year.
Small Businesses that have been impacted by COVID-19:
- Certain small businesses with up to 500 employees will be able to take out loans up to $10M or up to 2.5X payroll costs for the previous year(excluding annual compensation of amounts over $100,000 per person), which will be eligible for forgiveness if used to cover payroll and other expenses (like rent and utilities) in the 8 weeks following when the loan was made. This program will run through banks who are SBA preferred lenders. And as if this benefit wasn’t good enough, it actually gets even better! Any debt forgiven pursuant to this provision is not included in taxable income for the year. The SBA has asked for 15 days to get their processes up and running before it can began accepting applications. The maximum interest that can be charged on these loans is 4%.
- Other benefits for businesses include a delay in the employer’s portion of Social Security payroll tax until January 1, 2021 with half of the deferred amounts due at the end of 2021, and the other half due at the end of 2022(with the exception of those who qualify for loan forgiveness under the CARES act). This also applies to self employed people.
- The Act adjusts Net Operating Loss rules allowing any NOL from 2018, 2019 or 2020 to be carried back up to five years. In theory, this should allow companies to reduce prior year’s tax bills, allowing them to claim refunds of amounts previously paid, to provide further liquidity to get them through this crisis.
Other changes to note include:
- An increase of $600 per week for unemployment benefits for up to four months as well as an expansion of benefits for those who would otherwise not normally qualify (like self-employed individuals and independent contractors)
- The deferral of Federal student loan payments through September 30, 2020 and no interest will accrue. You need to proactively contact the student loan provider and stop the payments.
Beyond benefits for individuals and businesses, the CARES Act provides for $454 billion in emergency lending, not only to states and municipalities, but to airlines and other businesses critical to US national security, and another $150 billion allocated proportionally to state and local governments to offset amounts used to respond to the pandemic.
Ultimately, the key point is that the CARES Act is a historic emergency relief program for Americans and provides much-needed assistance for those affected by the pandemic and the resulting economic damage. And with changes in tax laws come planning opportunities that we want to make you aware of. And we are here to help you.
If you would like to have a discussion about your particular situation as it relates to this new law, please give us a call. In the coming weeks and months, we will be reaching out to you with more information and contacting our clients directly to assist in helping you maximize any benefits you are eligible for.
Best to all of you who are tired of being cooped up in your houses,