On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus package designed to increase liquidity in the economy through measures including relaxation of limits on business deductions, tax deferrals and direct recovery rebates for taxpayers. According to the President, this is the largest piece of legislation (in US dollars) ever passed by the U.S. government.
Following are questions and answers about the CARES Act. This post has been updated as new information or clarifications have become available. Updated information is red, and each question below marked with “(FINAL)” indicates that we are satisfied that our answer is correct.
What is the CARES Act? (FINAL)
The CARES Act is the third piece of the Coronavirus Economic Stimulus Plan. The first was a $8.3 spending bill passed on March 6, 2020 aimed at testing, research, and acquiring healthcare equipment. The second was the Families First Coronavirus Response Act (FFCRA). The FFCRA and the CARES Act are primarily focused on economic stabilization and recovery.
The CARES Act will affect much of America. It provides forgivable small business loans to provide job and business continuity for up to eight weeks. It also provides Recovery Rebates to many Americans paid via direct deposit or checks.
The Recovery Rebate is an advance refund of credits against 2020 taxes.
Single individuals with Adjusted Gross Income (AGI) of less than $75,000 (as reported on 2019 income tax returns) will receive $1,200 plus $500 for each child in their household. This amount will decrease as AGI increases above the $75,000 threshold and will be $0 at $99,000 AGI. Married couples with AGI of less than $150,000 will receive $2,400 plus $500 for each child in their household. This amount will decrease as AGI increases above the threshold and will be $0 at $198,000.
The Recovery Rebate is a tax credit. In effect, it is an advance payment of the tax refund you would expect to receive on your 2020 income tax return which will be filed in early 2021. If, however, your actual income in 2020 is above the thresholds, we believe you will not be required to repay the amount of advance payment you received.
If you have an eligible (under 17 years old) dependent child in 2019 who will no longer be a dependent in 2020, we believe you will not be required to pay back the $500 Recovery Rebate to the IRS on your 2020 tax return. Your child, however, may receive up to a $1,200 credit on his/her 2020 tax return.
Please contact your WBL advisor to discuss your specific situation and needs. We’ll do our best to guide you through this difficult and unprecedented situation.
What is the Paycheck Protection Program? (FINAL)
The CARES Act includes the Paycheck Protection Program (PPP), an enhancement of the Small Business Administration’s (SBA) existing small business loans through private lenders. The enhancements include additional benefits for small businesses and nonprofits and are fully guaranteed by the U.S. Government. The PPP will provide loans and grants to small businesses in order to help cover short term obligations such as payroll, rent, and interest on other obligations. More information on the PPP is available in this recent WBL blog post.
What companies qualify for these forgivable small business loans? (FINAL)
The CARES Act simply states that any business concern employing less than 500 employees is eligible.
An SBA loan specialist, your existing banker or your WBL advisor can help.
Lenders began accepting loan applications from small businesses on April 3, 2020. They began accepting applications from self-employed individuals on April 10, 2020.
The funds can be used for payroll costs, mortgage, rent, interest on debt obligations, and utilities in order to keep the business running.
Maybe. While a business is eligible to receive a loan equal to 2.5 months of payroll costs, not all costs incurred are forgivable. Notably, any principal paid on a mortgage or other debt obligation cannot be forgiven under this program. No compensation paid and refunded in the form of payroll tax credits under the Families First Coronavirus Response Act is eligible for forgiveness. Please see WBL’s recent blog post on the PPP for more information.
The CARES Act includes provisions that make it easier for taxpayers to access money in their retirement funds, as we explain below. However, we want to strongly caution against using or pulling from your retirement plan funds. Borrowing from or withdrawing funds early from retirement savings should only be considered as a “worst case” scenario and discussed in great detail with a financial expert before any action is taken.
Can I take a distribution from my retirement plan tax free? (FINAL)
The CARE Act allows up to $100,000 per individual to be taken early from tax deferred retirement plan as a Coronavirus-Related Distribution but any amount disbursed would be subject to taxes. This special distribution can be spread over three years, and you will also have the ability to pay it back over three years to prevent treatment as taxable income.
Can I borrow funds from my retirement plan? (FINAL)
This depends on the retirement plan’s governing document; however the CARES Act allows for amendments to the plan to increase the amount which can be loaned to the beneficiary. Check with your employer or plan administrator to see if this is a possibility for you.
Can I pull funds out of my retirement plan without penalties? (FINAL)
This is still uncertain, but we believe that is the intent of the Act.
Do I have to withdraw my Required Minimum Distribution (RMD) for 2020? (FINAL)
No. The Act creates an exception to the RMD rules for the 2020 tax year.
- The CARES Act corrects the so-called “retail glitch” effective back to the 2018 tax year allowing businesses to amend returns to claim bonus depreciation on qualified improvement property.
- The business interest limitation under Sec 163(j), which formerly was set at 30% of adjusted taxable income, has been reset to 50% for the 2019 & 2020 taxable years. If your 2019 tax return has been filed using the 30% limitation, consider whether an amendment is necessary. This, when used in conjunction with the next two changes to loss rules, can result in a near-term cash inflow for the company.
- Net Operating Losses (NOLs) for the years 2018-2020 can be carried back five years. This will give taxpayers the ability to amend prior year tax returns and get back tax dollars previously paid.
- Limitations on Excess Business Losses for 2018-2020 are eliminated. This will also give taxpayers the ability to amend prior year tax returns to get back tax dollars previously paid.
- In an effort to thank companies and individuals for charitable giving during 2020, limits on deductions for donations have been relaxed, and an above-the-line charitable deduction up to $300 has been created for individuals who do not itemize their deductions.
- The CARES Act appropriates funds for certain industries, which were deemed to be hardest-hit by the Coronavirus and related business closures.
- The CARES Act includes education related provisions. One additional provision allows employers to pay employees or their lender for student loan debt up to $5,250 tax free to the employee. This is only available to employees and employers for the 2020 tax year.
- The CARES Act provides a technical correction to the Families First Coronavirus Response Act. Employers may now rehire employees, if they were laid off after March 1st, and they will be eligible for the leave provisions provided in that Act.
- The CARES Act provides for enhanced and extended unemployment benefits.
The CARES Act provides for an employee retention credit equal to 50% of an employee’s wages and healthcare costs. The maximum credit allowed is $5,000 per employee. The credit is available to all employers with fewer than 100 employees regardless of COVID-19’s impact to their gross receipts. Employers with more than 100 employees whose gross receipts have been cut to 50% or less of their comparable quarter in the prior year are also qualified for this credit. Non-profits are automatically qualified for this credit. This credit cannot be claimed if the employer receives a loan under the Paycheck Protection Program (PPP).
- The CARES Act provides for a deferral on payments of employer payroll taxes. Any employer portion of Social Security taxes attributable to the remainder of the 2020 tax year is due in two 50% installments on 12/31/21 and 12/31/22. This deferral of payroll taxes is not available to employers who receive a loan under the PPP.