The CARES Act: help for individuals and small businesses

As we adjust to the effects of COVID-19 in our lives, stimulus package passed by Congress on March 27th may help individuals and small businesses. The Coronavirus Aid, Relief and Economic Security (CARES) Act, as well as previously announced tax filing relief, should help with business and personal cash flows and provide economic stimulus. In addition, prior action by the Federal Reserve to reduce interest rates and provide liquidity to markets has eased some of the economic impact, and both Congress and the Federal Reserve have signaled that additional relief would be provided as the crisis unfolds. For now, we’ve outlined the key provisions of the recent legislation below and posted separately about how this legislation provides relief for retirement plan participants.  We will do our best to update this as we learn new information; as we have seen with any speedily passed legislation, technical corrections are quite likely:

Immediate Relief for Individuals

The CARES Act Recovery Rebate provides direct payments of $1,200 per individual with an additional $500 per child under age 17, for incomes up to $75,000 for individuals and $150,000 for married filing jointly. This is actually a credit against 2020 taxes and there is a phase-out starting at these levels and going up to $99,000 for individuals and $198,000 for couples filing jointly. How those payments will be made is still being sorted out. For additional information and updates, check out https://www.irs.gov/coronavirus.

Unemployment compensation is being increased by $600 per week and extended for an additional 13 weeks (total of 39 weeks) with a waiver on the one-week waiting period (benefits start right away). Some details of who will be covered by this provision are still pending. It is likely that non-profit organizations and religious organizations, which may normally be exempt from state unemployment requirements, are covered by the federal expansion of benefits under the CARES Act.

For Small Business Owners

Under the Paycheck Protection Program of CARES, lenders will be able to issue small businesses (up to 500 employees) loans up to a maximum of either $10 million, or 2.5 times the average payroll costs (whichever is less) over the previous year (up to $100,000 per employee). These loans are provided through local lenders and are expected to be in high demand as there are very generous provisions that potentially forgive loan repayment. The amount eligible to be forgiven is the amount spent, during the first 8 weeks after the loan is made, on: payroll costs (up to $100k per person), rent (for a lease in place before February 15, 2020), utilities (for services which began before February 15, 2020) and group health insurance premiums and other healthcare costs. Check to see if your business qualifies and how to apply.

Please note that in order for the loan proceeds to be forgiven the business must maintain the same number of employees (equivalents) from February 15, 2020 through June 30, 2020 as it did during either the same period in 2019, or from January 1, 2020 until February 15, 2020. To the extent this requirement is not met, the amount eligible for forgiveness will be reduced, ratably. However, the rules may evolve and change, so review the most current information about this program.

In a separate program, $10,000 in emergency grant cash may be provided and forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue loss.

Deferral of taxes

With the exception of employers who have debt forgiven by the CARES Act for their SBA Loans, employers are eligible to defer payroll taxes from the date of enactment, through the end of the year, until the end of 2021 and 2022. Basically, 50% of the payroll taxes that would otherwise be due during this period may be deferred until December 31, 2021. The remaining 50% is due on December 31, 2022.

If you are self-employed, this relief applies to you too, at least with respect to the ‘employer equivalent’ portion of your self-employment taxes.

For all entities, including individuals, Federal tax filings and payments are delayed from April 15th until July 15th. This essentially makes July 15th the tax filing deadline for all provisions, including making SEP-IRA, SIMPLE-IRA, Solo 401ks and profit sharing plan contributions. These deadlines are extended further if your return goes on extension. Of note, while 1st quarter estimated tax payments, usually due April 15th are extended until July 15th, 2nd quarter estimated tax payments are still due on June 15th, though this may change. States set their own tax deadlines and in the State of California the tax filing and payment deadline is also extended through July 15th, 2020. Please check your own state’s web site for additional state information.

Retirement plan changes

Required Minimum Distributions (RMDs) are waived for 2020. If you have already taken your RMD you may be eligible to return it, subject to certain conditions. For some clients, this may be helpful in reducing taxable income for 2020 and not having to withdraw funds in the midst of market volatility.

For inherited IRAs, 2020 is ignored for the purposes of the 5 year distribution rules.

There are also rules waived on distributions from IRAs and employer-sponsored plans for those directly affected from the coronavirus (including loss of income from being laid off or furloughed or reduced hours at a business you own, and other provisions). Retirement plan hardship distributions up to $100,000 now waive the 10% penalty and mandatory withholding, and repayment is available over three years. The income tax on these distributions may also be spread over three years. There is also some loosening of 401k loan provisions, including loans up to 100% of vested balance (up to $100,000) and delayed loan payments up to one year, though interest will accrue.

Other Changes

Student loan payments are deferred until September 30, 2020.

The Adjusted Gross Income limits for charitable contributions is waived for 2020.

We wish you and those you care about all the best of health and more.