The $2.2 trillion fiscal package known as the Coronavirus Aid, Relief, and Economic Security Act or “CARES” Act was signed into law on March 27, 2020. This robust and dynamic piece of legislation is intended to provide economic relief to individuals, businesses, and other entities impacted by the COVID-19 pandemic.
We previously detailed important provisions regarding temporary changes to rules governing many qualified retirement plans, including the suspension of 2020 required minimum distributions (RMDs). Our comments and further explanation on this topic can be found here:
We now summarize additional provisions of the CARES Act (the “Act”) intended to provide relief to individuals and businesses.
Individual Rebates: As you are likely aware, certain “eligible individuals” have received or will receive a rebate from the IRS in an amount determined by the individual’s adjusted gross income (AGI). Those “eligible individuals” (i.e., not dependent on another taxpayer and with a work eligible social security number) with an AGI up to $75,000 for single filers (or $112,500 for head of household or $150,000 for married filing jointly) are allowed a full rebate of $1,200 (or $2,400 for married filing jointly). Those with children under the age of 17 will receive an additional $500 per child. The full rebate amount is reduced as AGI increases and is phased out completely when AGI reaches a certain level ($99,000 for single filers with no children; $146,500 head of household with one child; $198,000 married filing jointly with no children).
Retirement Account Distributions and Loans: Distributions from retirement accounts up to $100,000 for COVID-19 related purposes are exempt from the 10% premature distribution penalty. Those eligible for such distribution include individuals diagnosed with the disease, or whose spouse or dependent has been diagnosed, or those experiencing certain “adverse financial consequences” resulting from COVID-19. Distributions must be made in 2020. Income from the distribution will recognized ratably over a three-year period or can be repaid over the three-year period to avoid the taxes. Loans of up to $100,000 (previous limit $50,000) from retirement accounts may be made within 180 days of enactment of the Act. Such loans may include 100% of the account balance (previous limit 50%) and certain outstanding loan payments may be delayed. As we have advised in our financial planning practice, taking money from a retirement plan and paying taxes for living expenses should be avoided if possible, but these are extraordinary times. The ability to restore some, or all, of these withdrawals is welcome relief.
Student Loans: Federally held student loans payments are suspended from March 13, 2020 through September 30 of this year. During this time, interest will not accrue. Those who are able may benefit from continuing payments as, after satisfaction of unpaid interest accrued prior to March 13, funds will go towards payment of loan principal. Employers may also provide a student loan repayment benefit to employees on a tax-free basis up to $5,250 annually, under certain additional criteria and limitations.
Charitable Contribution Limit Modifications: The percentage limitations for individuals who itemize deductions and make charitable contributions have been eliminated for 2020, meaning that up to 100% of AGI is now deductible. Further, the amount in excess of the contribution base can be carried over. Note that individual partners or shareholders must make elections separately for charitable contributions made from partnerships or S-corporations. Corporations may make contributions up to 25% (previously 10%) of the taxpayer’s taxable income in 2020.
Paycheck Protection Program (PPP): The U.S. Small Business Administration (SBA) has offered a loan program to small businesses in operation as of February 15, 2020 intended to help keep workers on payroll. Lenders (i.e., banks, not SBA) began processing applications on April 3 and the loan period was originally scheduled to end on June 30, 2020. The maximum loan available is the lesser of $10 million or 2.5 times the company’s average monthly payroll and no personal guarantees or collateral are required to apply. If the full loan amount is used for “qualified expenses” (i.e., salary, benefits, rent, utilities, mortgage interest, interest on debt incurred prior to the covered period), the company can apply for loan forgiveness. Any amount not forgiven must be paid back within two years with one percent (1%) interest.
Important update: Currently, the PPP funds have been fully deployed and the SBA website states they are unable to accept new applications. The federal government is in negotiations regarding another aid package. As of the writing of this article, a deal has not been finalized.
Small Business Loans: Small businesses may also apply for an Economic Injury Disaster Loan (EIDL). EIDL loans are issued by the SBA and are capped at $2 million per organization. Loans carry an interest rate of 3.75% or 2.75%, depending on the organization, and have terms of up to 30 years. Unlike the PPP, EIDL loans are not forgivable. A business may apply for both the PPP and EIDL but cannot use the proceeds for the same expenses. EDIL applicants can also request a $10,000 advance on the loan within 3 days of applying to meet certain emergency expenses. The advance does not need to be repaid, even if the loan application is denied, but any PPP loan forgiveness will be reduced by the $10,000 advance.
Important update: As with the PPP, SBA states on their website that they are currently not accepting new applications for EIDL loans or advances based on available funding.
Business Tax Relief: Several tax relief measures are available for businesses through the Act. Employers facing certain hardships related to COVID-19 may be eligible for a refundable tax credit for their 6.2% share of Social Security tax. Such employers may instead delay payment of their 6.2% share between March 27, 2020 and December 31, 2020. If delayed, 50% of the tax will be due on December 31, 2021 with the remainder due one year later. Neither the tax credit nor delayed payment option are available for employers who receive a forgivable SBA loan. In addition, modifications have been made to rules covering Net Operating Loss and limitations on excess business losses.
Additional guidance and clarification on the CARES Act provisions have been introduced almost daily since the legislation was signed into law. While we made every attempt to ensure the information included herein is current as of the date written, undoubtedly relevant updates will surface in the immediate future. Should you have questions about the topics covered, other aspects of the CARES Act not discussed, or how any such provisions may impact your family or business, please reach out to your WMS advisor.