On March 27th, the “Coronavirus Aid, Relief, and Economic Security Act,” also known as the “CARES Act,” was signed into law. This is a $2 trillion emergency fiscal stimulus package intended to limit the economic damage created by the Coronavirus. The CARES Act includes various types of aid for both individuals and small businesses. The following is a summary of the key provisions.
The CARES Act provides a refundable income tax credit of up to $1,200 each (or $2,400 for married couples filing a joint return). The credit amount is increased by up to $500 for each child a taxpayer has under the age of 17. The rebate is subject to the following AGI income limitations:
- Married Joint: $150,000
- Head of Household: $112,500
- All Other Filers: $75,000
For those who earned more than the limits listed above, the rebate begins to phase-out and is reduced by $50 for every $1,000 of income that exceeds the threshold amounts. Rebate amounts will be based 2018 tax return information (or 2019 tax return information, if you’ve already filed).
2020 RMDs Waived
The required minimum distribution (RMD) rules for certain defined contribution plans and IRAs are waived for 2020 if they otherwise would be required to withdraw retirement funds during the economic slowdown due to COVID-19.
Withdrawal Penalty Waived
The 10-percent early withdrawal penalty is waived for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes that occur on or after January 1, 2020.
Tax owed from these distributions can be paid over three years, and the taxpayer may recontribute funds to an eligible retirement plan within three years without regard to that year’s caps on contributions.
Loans from Retirement Plans
Individuals can take loans of the lesser amount of $100,000 or the current value of their vested benefits in retirement accounts for 180 days starting on March 27, 2020.
Individuals affected by the coronavirus with loans due by December 31, 2020, would have an extra year to repay them.
“Coronavirus-related purposes” means a distribution to a person, spouse, or dependent diagnosed with COVID-19 or who experiences “adverse financial consequences” from being quarantined, laid off, being unable to work due to lack of childcare, etc.
Taxpayers are encouraged to contribute to churches and charitable organizations in 2020 by deducting up to $300 in cash contributions, regardless if they itemize their deductions.
Small Business Provisions
Paycheck Protection Program
Small business owners who have 500 or fewer employees (with limited exceptions), including self-employed individuals, can benefit from this program by requesting loans for up to 2.5 times the average monthly payroll expense over the previous year (total loan amount is capped at $10 million).
- Loans will have a maturity period of 2 years and a fixed interest rate of 0.50%
- Any amounts spent on certain items during the first 8 weeks after the loan is made may be eligible for forgiveness
- Amounts that are forgiven will even be excluded from taxable income for the year
- Expenses that may be eligible for forgiveness are payroll, utilities and rent. The business must maintain the same number of employees in the eight weeks following the date of loan origination.
- Compensation for employees who receive less than $100,000 annually cannot be reduced by more than 25%.
- Loans are provided by lenders approved by the SBA and will be guaranteed by the SBA.
Economic Injury Disaster Loans (EIDLs)
- The EIDLs offer up to $2 million for working capital needs.
- The interest rate is 3.75% for businesses and 2.75% for nonprofits with a 30-year term.
- The first loan payment is not due for a full year; however, interest will begin to accrue upon disbursement.
- You can request a $10,000 grant for working capital needs. The SBA states that you will receive this grant regardless if you ultimately qualify for an EIDL loan.
- You can quickly apply for an EIDL directly through the SBA at www.SBA.gov/disaster
Employee Retention Credit
- Provides a refundable payroll tax credit for 50 percent of wages paid to employees during the coronavirus emergency.
- Credit available to employers whose operations were fully or partially suspended due to a COVID-19 shutdown order, or gross receipts declined by more than 50 percent compared to same quarter in prior year.
- The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee and is available for wages paid between March 13 and December 31, 2020 and can’t be combined with PPP loans.
Delay of Payroll Taxes
- Allows employers and self-employed individuals to defer payment of employer share of Social Security tax (generally 6.2 percent of wages) to be repaid over the following two years. Half of the amount would be required to be repaid by December 31, 2021, and the balance by December 31, 2022.
Business Interest Limitation
- Temporarily increases amount of deductible interest expenses by a business from 30 percent to 50 percent of taxable income (with adjustments) for 2019 and 2020. Will allow businesses to increase liquidity with a reduced cost of capital and help them continue operations and keep employees on the payroll.
While not part of The CARES Act, we wanted to reiterate the IRS has extended the tax-filing deadline for 2019 federal income tax returns from April 15 to July 15. This extension of the tax-filing deadline also postpones the deadline for making 2019 prior-year contributions to Traditional, Roth IRAs and HSAs from April 15 to July 15th. Finally, for those making quarterly payments: your 2020 first quarter tax payment deadline is now July 15th; however, your second quarter tax payment is still due on June 15th.
The CARES Act included many key provisions that will likely affect you in some capacity. Please reach out directly to us if you would like to discuss how this will impact you and/or your business. We hope everyone stays safe and healthy. Thank you for entrusting us to help you achieve your goals.