On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was passed in an effort to provide economic relief to a wide range of individuals, small businesses, and certain industries heavily impacted by the COVID-19 outbreak, including transportation and health care.
In an effort to provide you with the most up-to-date information, we’ve summarized some of the key points of the CARES Act below. We know that during these uncertain and unprecedented times, fear of the unknown and anxiety for the future can weigh heavily on our minds. Our goal is to alleviate some of that stress with data, guidance, and communication. Please consult your tax advisor for specific guidance on how the changing rules will impact you.
The CARES Act: Key Highlights of the Stimulus Package
While the CARES Act is not a solution to every financial issue, it does offer the potential for meaningful financial relief to individuals, companies and state governments. For example:
- If you take Required Minimum Distributions (RMDs) from your retirement accounts or inherited IRAs, you can suspend those RMDs for 2020 if you prefer not to withdraw funds in a down market (or simply would prefer not to pay taxes on those distributions this year).
- If you own a small business or run a nonprofit, you may be able to take a forgivable loan of up to 2.5 times your average monthly payroll costs. If you use the funds to pay your staff, your rent, your utilities, or the interest on your mortgage, the loan principal will beforgiven.
- If you earn $75,000 or less as a Single taxpayer or $150,000 or less as Married Filing Jointly taxpayers, you can receive $1,200 per adult and $500 per qualifying child as a direct payment.
Benefits to Individuals
Immediate Payments to Taxpayers
- How Much: $1,200 per taxpayer or $2,400 for a married couple filing jointly plus $500 per qualifying child.
- Who is Eligible: All taxpayers whose 2019 adjusted gross income is less than $99,000 (Single) or $198,000 (Married Filing Jointly). Note that payments are phased out for taxpayers making over $75,000 (Single) or $150,000 (Married Filing Jointly).
- Other Considerations: These rebates are not likely to be taxed as income.
Student Loan Relief
- Payments Suspended: Federal student loan payments are suspended through September 30, 2020 and shall not accrue interest.
- Tax Relief: Students will not have to pay income tax on employer-made payments for education (which historically were taxed).
- Who is Eligible: Expanded to include self-employed workers, independent contractors, and freelancers (the “gig economy”).
- How Much: An additional $600/week for 4 months on top of state benefits. Benefits are extended to 39 weeks. (Many states, including California, normally limit benefits to 26 weeks.)
Reprieve from Negative Credit Reporting
- Who is Eligible: Borrowers who skip or defer a payment during the COVID-19 “covered period.” (Note that this does not apply to payments or debts labeled delinquent prior to January 31, 2020.)
- What Happens: Borrowers will be reported as “current” on their credit reports so their credit scores are not impacted negatively.
No Foreclosure or Foreclosure-Related Evictions
- Who is Eligible: Borrowers with federally-backed mortgages who claim they were “harmed by the coronavirus outbreak.” This includes “multi-family borrowers” as defined by the Act.
- What Happens: As of March 18, 2020, mortgage servicers cannot initiate foreclosure proceedings or implement foreclosure-related evictions during the “covered period.” Borrowers get up to 360 days of mortgage forbearance.
Tax and Retirement Benefits
Extended 2019 Tax Filings/Payments
- Who is Eligible: Businesses and individuals who ordinarily have an April 15thdue date.
- New Deadline: July 15, 2020 to file and pay federal taxes, as well as contribute to IRAs. The deadline for extensions remains October 15, 2020.
- Estimated Tax Payments: April 2020 quarterly payments are due July 15, 2020. June and September 2020 quarterly payments are due as scheduled, though these may also shift.
- State Tax Deadlines: Please check your state’s tax board for their filing deadline. Most states, including California, are now aligned with the federal July 15th deadline.
- Note: If you expect a refund, please file promptly!
Retirement Plans: 2020 Required Minimum Distributions (RMDs) Waived
- Who is Eligible: Anyone with Required Minimum Distributions (RMDs) from retirement accounts for 2020. Eligible retirement accounts include:
- Traditional IRAs.
- Inherited IRAs (Traditional and Roth).
- 401(k)s, 403(b)s, and some other Defined Contribution Plans
- Planning Opportunity: We will reach out to you individually to stop any automatic retirement plan distributions designed to satisfy your 2020 RMD (which are not used to meet monthly cash needs)and to reverse any distributions that have been withdrawn year-to-date to the extent possible. This also presents a greater opportunity for Roth IRA conversions in 2020 considering recent market volatility.
Retirement Plans: 401(k) Early Distributions or Loans
- Hardship Distributions Doubled: Hardship distributions from 401(k)s, and certain other retirement plans have doubled to $100,000 (without the 10% penalty that normally applies to early withdrawals before age 59-½).
- These withdrawals are still taxable, but the income tax can be paid over 3 years.
- 401(k) Plan Loans: Loans from 401(k)s (and certain other qualified plans) can be taken up to the lesser of $100,000 or the account balance. Any new or existing 2020 loan repayment due can be delayed for a year.
- New Charitable Deduction: For those who do not itemize deductions, there will be an allowable “above the line” deduction for charitable contributions (not to exceed $300).
- No Charitable Contribution Limits: The 2020 charitable contribution limitation for individuals will now be 100% of your adjusted-gross-income, or “AGI,” if you donate directly to a charity. (Note: Donor advised funds and Section 509(a)(3) supporting organizations are not eligible.)
- The limitation is normally 30% of your AGI for stock gifts and 60% of your AGI for cash gifts. Anything above this income limitation carries over for five years.
- Planning Opportunity: Individuals may be able to offset a significant taxable income event in 2020 with a substantial charitable contribution.
Benefits to Small Businesses
Forgivable Loan for Up to 2.5 Months of Payroll
- Who Can Apply: Small businesses and nonprofits with fewer than 500 employees
- Hospitality businesses (e.g., restaurants, bars, hotels, and RV parks) can treat each of their locations separately.
- If you have more than 500 employees, you may still qualify. Talk to your financial advisor. Be sure to discuss this with your tax advisor.
- When You Can Apply: As soon as banks start processing the loans, which should be soon. Loans must be taken before June 30, 2020. Special provisions allow for “express loans” of up to $1MM, fast-tracking approval within 36 hours.
- How Much You Can Take: The loan amount is capped at the lesser of 2.5 times your average monthly payroll (based on the 1-year period before the loan date for most borrowers) or $10,000,000.
- How Loans are Forgiven: If you use the loan for “eligible expenses” during an 8-week period after your loan’s origination date, the amount up to the loan principal can be forgiven, tax-free. Eligible expenses include:
- Payroll costs, including salaries up to $100,000 (annualized) per employee, health insurance premiums, commissions, cash tips, and state and local payroll taxes – but not federal payroll taxes
- Interest payments on mortgages for real or personal property (but not principal or pre-payments)
- Loan Forgiveness Is Reduced If:
- You reduce your full-time equivalents (FTEs), including cutting hours, during the “covered period.”
- You reduce the compensation of employees who make less than $100,000/year by more than 25% during the “covered period.”
- However, you may avoid the reduction in forgiveness if:
- You make no further cuts within 30 days of passage of the Act.
- You rehire and raise wages to prior levels by June 30, 2020.
- Repaying the Loan
- Your interest, principal, and fees will be deferred for 6 months to 1 year.
- The interest rate will be capped at 4%.
- The maximum loan maturity is 10 years from the date you apply for forgiveness.
- There are no prepayment penalties.
- Other Considerations:
- No collateral or personal guarantees are required.
- Sole proprietors, independent contractors, and self-employed individuals are all eligible under this program.
- If you already have an Economic Injury Disaster Loan (EIDL) through the Small Business Administration for COVID-19, you can refinance it into this program, but you cannot hold both loans for the same expenses.
2020 Payroll Tax Deferral
- Who is Eligible: Employers who do not take advantage of the forgivable loan mentioned above.
- Deferral Dates: Employers can defer payment of their 2020 payroll taxes and pay:
- 50% in 2021.
- 50% in 2022.
Payroll Tax Credit
- Who is Eligible: Employers who do not take advantage of the forgivable loan mentioned above and who either:
- Are at least partly shut down due to government orders; OR
- Experience a decline of at least 50% in gross receipts for a 2020 calendar year quarter compared to the same quarter in 2019.
- Note: Nonprofits must be experiencing a partial shutdown due to government orders to qualify.
- Amount of Credit: Up to 50% of “qualified wages” of each employee
- Qualified wages are capped at $10,000 per employee.
- Applies to wages paid between March 12, 2020 and December 31, 2020.
- Credit is applied against employment taxes.
Note that there are additional provisions in the bill for relief for businesses, including modifications for net operating losses. Please consult your advisor for more information.
Please let us know if there is anything we can do to help you.
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