[ Updated April 3, 2020 | 2:13pm ]
COVID-19 Stimulus Package Offers Relief to Affected Individual Taxpayers
To help mitigate the financial and health crises related to the coronavirus (COVID-19), on Friday, March 27, 2020, President Trump signed into law the largest economic relief package in modern U.S. history. The $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is intended to shore up the country on multiple fronts and includes several components aimed at individuals.
One of the aspects receiving the most attention is the CARES Act’s so-called “recovery rebates.” The federal government will generally make direct payments of up to $1,200 to those who file their federal income tax returns as single filers or heads of households; married couples filing jointly can receive up to $2,400. Additional $500 payments will generally be made per qualifying child.
The nontaxable rebates are subject to phaseouts based on adjusted gross income (AGI) as reported on taxpayers’ federal 2019 income tax returns. If 2019 returns haven’t been filed, the 2018 tax returns will be used. The phaseouts begin at $75,000 for singles, $112,500 for heads of household and $150,000 for married couples. Payments are completely phased-out for single filers with AGIs exceeding $99,000 and for joint filers with no qualifying children and AGIs exceeding $198,000. For a head of household with one child, the payment is completely phased out when AGI exceeds $146,500.
Recovery Rebates for Social Security Recipients
The Treasury originally told preparers that people who had not filed tax returns because their income level did not require it, would not have to file a 2019 tax return in order to receive their stimulus check. Then, they reversed course and told the public that such individuals would have to file a return, providing a very small amount of information, and that they would let preparers know what was necessary. However, before the IRS even had a chance to provide that information, they reversed course and told the public no return would be required.
Treasury Secretary Steven T. Mnuchin later said in a statement. “Social Security recipients who are not typically required to file a tax return need to take no action, and will receive their payment directly to their bank account.”
The IRS stated it plans to use information on the Form SSA-1099 and Form RRB-1099 to generate payments to Social Security recipients who did not file tax returns in 2018 or 2019.
At this point, it appears as though, if someone is receiving social security, they will be identified and will receive their stimulus payment.
Expanded unemployment benefits
The CARES Act increases unemployment compensation benefits significantly, providing an extra $600 per week for up to four months, over and above state unemployment benefits. The expansion generally applies to those who can’t work as a direct result of COVID-19.
The law generally provides temporary full federal funding of the first week of unemployment benefits through December 31, 2020, for states that opt to pay recipients as soon as they become unemployed, rather than requiring a one-week waiting period. And it provides an additional 13 weeks of unemployment benefits through year end, generally for those who remain unemployed after state unemployment benefits are no longer available.
The law also creates a temporary Pandemic Unemployment Assistance program through the end of the year. The program generally will extend unemployment benefits to workers who traditionally don’t qualify for them — meaning self-employed individuals, independent contractors, those with limited work histories and others.
Penalty-free early retirement distributions
The CARES Act waives the 10% early distribution penalty for COVID-19-related withdrawals from IRAs, 401(k) plans and certain other retirement plans made on or after January 1, 2020, and through December 31, 2020. The waiver applies to distributions made to an individual:
- Who’s diagnosed with COVID-19,
- Whose spouse or dependent is diagnosed with COVID-19, or
- Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care because of COVID-19, or the closing or a reduction of hours of a business owned by the individual due to COVID-19.
Eligible individuals can withdraw up to $100,000 penalty-free. They can repay withdrawn funds within three years of the day after the distribution without regard to the applicable cap on annual contributions. To the extent such early distributions aren’t repaid within this period, the related income tax will be prorated over three years.
Waived required minimum distribution rules
The CARES Act similarly waives the required minimum distribution (RMD) rules for certain defined contribution plans and IRAs for calendar year 2020. This will help individuals avoid a financially imprudent sale of retirement assets during the stock market downturn.
The waiver covers both 2019 RMDs required to be taken by April 1, 2020, and RMDs required for 2020. It applies for calendar years beginning after December 31, 2019.
Expanded charitable contribution deductions
Individual taxpayers can take advantage of a new above-the-line $300 deduction for cash contributions to qualified charities in 2020. “Above-the-line” means the deduction reduces AGI and is available to taxpayers regardless of whether they itemize deductions.
The CARES Act also loosens the limitation on charitable deductions for cash contributions made to public charities in 2020, boosting it from 60% to 100% of AGI.
Student loan relief
Under the CARES Act, employers can provide up to $5,250 annually toward employee student loan payments on a tax-free basis before January 1, 2021. The payment can be made to the employee or the lender. (The employee can’t take a student loan interest deduction for any loan payment for which the exclusion is available.)
The law also allows individuals to stop making payments on federal student loans through September 30, 2020, without incurring penalties or late fees. In addition, no interest will accrue on federal student loans during this period. And the government is temporarily suspending garnishments to collect on federal student loans.
Mortgage and foreclosure relief
Homeowners with federally backed mortgages can request forbearance, regardless of their delinquency status and without incurring penalties, fees or interest. Eligible homeowners must submit a request to their loan servicers and affirm financial hardship during the COVID-19 emergency. A servicer is required to grant forbearance for up to 180 days and to extend it for an additional period of up to 180 days at the borrower’s request.
Further, except for vacant or abandoned property, servicers of federally backed mortgages can’t initiate any foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale for at least 60 days, starting March 18, 2020.
Borrowers with federally backed mortgages on multifamily properties can request a forbearance for up to 30 days if they were current on their loans on February. 1, 2020. They also can request two additional 30-day extensions.
The swiftly changing environment
No one knows when the COVID-19 public health emergency will end, or for how long the economic repercussions will linger. We’ll keep you informed on the latest developments and help you plan for a more stable financial future.
CARES Act Provides COVID-19 Pandemic Relief to Businesses
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) represents the third phase of Congress’s legislative efforts to address the financial and health care crisis resulting from the coronavirus (COVID-19) pandemic. In addition to providing relief to individuals and mustering forces to shore up the medical response, the CARES Act includes numerous provisions intended to help affected businesses, including eligible self-employed individuals, weather the crisis.
Employee retention tax credit
To encourage employers to keep their workforces intact, the CARES Act creates a new refundable credit against payroll tax. The credit is generally available to employers whose:
- Operations have been fully or partially suspended due to a COVID-19-related governmental shutdown order, or
- Gross receipts have dropped more than 50% compared to the same quarter in the previous year (until gross receipts exceed 80% of gross receipts in the earlier quarter).
Employers with more than 100 employees can receive the credit for employees who’ve been furloughed or who’ve had their hours reduced due to one of the reasons above. Those with 100 or fewer employees can receive the credit regardless of whether employees have been furloughed.
The credit equals 50% of up to $10,000 in compensation — including health care benefits — paid to an eligible employee from March 13, 2020, through December 31, 2020. Additional rules and limits apply.
Payroll tax deferral
The new law allows employers to delay their payment of the employer share (6.2% of wages) of the Social Security payroll tax. These taxpayers can pay the tax over the next two years, with the first half due by December 31, 2021, and the second half due by December 31, 2022.
Self-employed individuals receive similar relief under the law.
Relaxed restrictions on losses
Before the Tax Cuts and Jobs Act (TCJA), taxpayers could carry back net operating losses (NOLs) two years, and carry forward the losses 20 years, to offset taxable income. The TCJA limited the NOL deduction to 80% of taxable income for the year, eliminated the carryback of NOLs and removed the time limit on carryforwards.
The CARES Act loosens the TCJA restrictions. It allows NOLs arising in 2018, 2019 or 2020 to be carried back five years and temporarily removes the taxable income limitation for years beginning before 2021, so that NOLs can fully offset income.
The new law also amends the TCJA to temporarily eliminate the limitation on excess business losses for pass-through entities and sole proprietors. These taxpayers can now deduct excess business losses arising in 2018, 2019 and 2020.
Taxpayers may need to file amended tax returns to obtain the full benefits of these changes.
Modified limitation on business interest deductions
For tax years beginning after 2017, the TCJA amended the Internal Revenue Code to limit the deduction for business interest incurred by both corporate and noncorporate taxpayers. It generally limits the deduction to 30% of the taxpayer’s adjusted taxable income (ATI) for the year.
The CARES Act allows businesses to deduct up to 50% of their ATI for the 2019 and 2020 tax years. (Special partnership rules apply for 2019.) It also permits businesses to elect to use 2019 ATI, rather than ATI in 2020, for the calculation, which will increase the amount of the deduction for many businesses.
Expedited depreciation of qualified improvement property
Prior to the TCJA, qualified retail improvement property, restaurant property and leasehold improvement property were depreciated over 15 years under the modified accelerated cost recovery system (MACRS). The TCJA classifies all of these property types as qualified improvement property (QIP).
The legislative history of the TCJA is clear that Congress intended QIP placed in service after 2017 to have a 15-year MACRS recovery period and, in turn, qualify for 100% bonus depreciation through 2023, when the allowable deduction will begin to phase out. But, in what’s been called “the retail glitch,” the statutory language didn’t define QIP as 15-year property, so QIP defaulted to a 39-year recovery period, making it ineligible for bonus depreciation.
The CARES Act includes a technical correction to fix this drafting error. Hotels, restaurants and retailers that have made qualified improvements during the past two years can claim an immediate tax refund for the bonus depreciation they missed. They also can claim bonus depreciation going forward, according to the phaseout schedule.
Expanded SBA assistance for small businesses
The CARES Act expands the ways the Small Business Administration (SBA) can help small businesses remain open and meet payroll. For example, it temporarily doubles the maximum loan amount under its primary low-interest loan program from $5 million to $10 million (or 2.5 times the average total monthly payroll costs for the prior year, whichever is less).
The law expands the allowable use of the so-called “Section 7(a)” funds to include payroll support, including paid leave, mortgage payments, insurance premiums and debt obligations, and waives many of the usual requirements, such as collateral and personal guarantees. Moreover, if employers maintain their payrolls for eight weeks after the loan origination, the portion of the loan applied to payroll, mortgage interest, rent and utilities will be forgiven.
To qualify, businesses generally must have 500 or fewer employees and have been operational on February 15, 2020. Sole proprietors, independent contractors and other self-employed individuals may qualify.
Amendments to the new paid leave law
The CARES Act also makes some critical modifications to the Families First Coronavirus Response Act, which was signed into law on March 18. That law temporarily requires certain employers to provide expanded paid sick and family leave for certain employees affected by COVID-19.
The CARES Act provides a new rule that defines “eligible employee” for purposes of paid sick and family leave to include employees who:
- Were laid off by the employer March 1, 2020, or later,
- Had worked for the employer for at least 30 days in the 60 calendar days prior to the layoff, and
- Have been rehired by the employer.
And the CARES Act allows advances on anticipated tax credits for employers’ paid leave costs and provides penalty relief for employers that don’t deposit tax amounts because they expect credits.
More to come?
Several members of Congress have suggested that the CARES Act won’t be the end of the federal legislative relief in response to the COVID-19 pandemic. We’ll keep you informed of new developments that could affect your bottom line and help you navigate the best financial course forward during these uncertain times.
Small Business Owner’s Guide
The U.S. Senate Committee on Small Business and Entrepreneurship recently published a PDF that provides some fairly detailed answers to most organizations questions. Particularly, the document addresses the following areas:
- Using capital to cover the cost of retaining employees through Paycheck Protection Program (PPP) Loans.
- According to the report, “The program would provide cash-flow assistance through 100 percent federally guaranteed loans to employers who maintain their payroll during this emergency. If employers maintain their payroll, the loans would be forgiven, which would help workers remain employed, as well as help affected small businesses and our economy snap-back quicker after the crisis. “
- An expedited loan of a smaller amount of cash to cover businesses expenses through Economic Injury Disaster Loans and Emergency Economic Injury Grants
- These grants provide an emergency advance of up to $10,000 to small businesses and private non-profits impacted by COVID-19. According to the report, “The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll…” among other things.
- The Act also provided relief to small businesses with loans already through the Small Business Debt Relief Program.
- The program is meant to provide immediate relief to small businesses that hold non-disaster SBA loans (specifically 7(a), 504, and microloans were addressed). Through the program, the SBA will cover all loan payments on these SBA loans for six months. This relief is also available to any new borrowers who take out loans within six months of the bill being signed into law.