The Coronavirus Aid, Relief, and Economic Security (or CARES) Act was recently passed to assist individuals and businesses facing difficulties related to the COVID-19 pandemic and economic slowdown. We have summarized key highlights to help you decipher the Act and determine what relief may be available to you. There are significant details for many of these provisions. As such, we encourage you to speak with your advisor or tax professional about your specific situation to determine your next steps.
Individuals may receive up to $1,200 in refundable income tax credit and married couples may receive up to $2,400, plus up to $500 per qualifying child under the age of 17. These amounts are based on adjusted gross income (AGI) from 2018 or 2019 tax returns filed. No payments will be provided if the AGI is over $99,000 for individuals, $198,000 for married couples filing jointly, and $136,500 if you are the head of household.
Deductions help decrease your gross income and with the CARES Act, you can now take advantage of a new above-the-line charitable deduction for 2020, not to exceed $300. The Act also increases the AGI limitations for charitable contributions for this year to 100% of AGI for individuals and 25% of taxable income for corporations.
Beginning in 2020, if you have a Health Savings Account (HSA), Archer Medical Savings Account (MSA), or Healthcare Flexible Spending Account (FSA), qualified medical expenses now include over-the-counter medications. High-deductible health plans (HDHPs) can now cover telehealth and other remote care services without charging a deductible. Medicare enrollees are entitled to a free COVID19 vaccine (when available) and a 90-day supply of medicines.
You have up to 3 years from the distribution date to redeposit the money. You can return some or all of the distribution to any retirement plan or account to which the distribution could have been rolled over tax-free. These redeposits will be treated as rollovers for purposes of computing contribution limits. Unfortunately, this feature is not available to inherited IRAs. Any beneficiaries that inherited retirement accounts in 2020 are subject to the new rules of the SECURE Act. For more information about the SECURE Act, please visit our resource center.
If you don’t need to withdraw retirement funds this year, then this measure will save you taxes in 2020 and give your retirement balances an extra boost.
For non-designated1 beneficiaries who inherit a retirement account from a person who died before 72 years old, i.e. the deadline for a traditional IRA owner to take the first RMD, the account typically has to be distributed within five years of the owner’s death. With the Act, if one of the five years is 2020, beneficiaries get an extra year for distribution, turning a five-year rule into a six-year rule.
For coronavirus-related distributions, the 10% early withdrawal penalty is waived for distributions from IRAs and 401(k)s, up to $100,000. The 20% mandatory withholding rules for qualifying distributions are also waived.
Distributions can be repaid within 3 years and will not be treated as taxable withdrawals. This allows retirement withdrawals to act as short-term, interest-free loans as long as they’re paid back within 3 years. Note that amounts not repaid are taxable – tax is paid either in the year of the withdrawal or spread over 3 years.
Qualifying distributions include covering costs in the following cases:
Along with the tax filing dates being moved from April 15 to July 15, you now have until July 15 if you want to contribute to your 2019 IRA or other retirement accounts. If you have extra money and want to take advantage of the market pullback, you can start funding your 2020 retirement accounts.
Required payments on federal student loans are suspended through September 30, 2020 and no interest will accrue on this debt. It’s important to note that this relief only applies to federal student loans. If you have private student loans, you should contact your loan provider to discuss options. While the relief is automatically applied, some details, such as accounts paid by automatic debit have not yet been confirmed and may vary by loan servicer.
Only 50 percent of 2020 payroll taxes have to be paid by December 31, 2021 and the rest will be due by December 31, 2022. These same parameters will be applied to those who are self-employed. This delay of payment is not available to those who have applied for and get their debt forgiven through the Small Business Paycheck Protection Program (PPP). Please check with your tax advisor or accountant on how this may impact you.
Social security taxes on wages starting March 27, 2020 through January 1, 2021 can be deferred. Fifty percent of the employer portion of these taxes can be deferred until December 31, 2021 while the remaining amount needs to be paid by December 31, 2022. Medicare taxes and employee Social Security tax payments are not deferred.
The credit for paid sick leave and paid family leave can be refunded in advance up to $5,000 per employee for wages paid from March 12, 2020 – January 1, 2021. Eligible employers can fund this credit by accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS or by requesting an advance of the credit from the IRS.
The CARES Act now allows companies to carry back any NOL from 2018 to 2020 for five years. Note, you must amend prior years’ tax returns and taxpayers can elect to forgo the carryback.
For pass-through entities (like LLCs) and sole proprietors, the CARES Act temporarily repeals cumulative losses taxpayers can claim for their businesses, so there is no longer a cap on business losses for noncorporate taxpayers. Losses were previously capped at $250,000 per year, or $500,000 for married couples filing joint returns.
Employers can deduct up to 50% of business interest expense of adjusted taxable income (ATI) for 2019 and 2020. Taxpayers also can elect to use 2019 ATI in place of 2020 for the computation.
Businesses, especially those in the hospitality industry, can immediately write off costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building.
Most businesses including those who are self-employed that have payroll and less than 500 employees can qualify for new Small Business Association (SBA) loans. Loan amounts are up to 2.5x the monthly payroll, or $10MM, whichever is less, with certain restrictions and adjustments.
If you need a smaller cash infusion right now, up to $10,000 of Economic Injury Disaster Loans (EIDL) can be received as an advance payment within 3 days of applying. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments. Apply for the SBA Economic Injury Disaster Loan using the SBA Form 5 (or Form 5C if you are a sole proprietor) and EIDL Supporting Information (Form P-019). You can upload your application with the SBA here (scroll to bottom of the page and find the “Upload Business Forms” option).
The SBA Paycheck Protection Program (PPP) is now law and applications are available. Lenders will start processing applications on April 3 for small businesses and sole proprietors, and April 10 for those self-employed. There is a cap on funding of $349 billion so time is of the essence to apply. Part, or all, of the loan may be forgiven, based on the amount of payroll expense, mortgage interest, rent, and utilities paid by the business owner. The loan forgiveness amount is reduced if employees are laid off, although they can be rehired by June 30 to avoid reducing loan forgiveness. Be sure to document these expenses to show you’re eligible for loan forgiveness. The SBA PPP loan will be processed through local banks so if possible, it might be preferable to use your current bank if it is already an SBA approved lender. Please refer to the attached link for approved lenders.
If funds are too limited while waiting for SBA funding, consider using a line of credit or other bank financing options.
There are a lot of details to the CARES Act so we encourage you to review these highlighted points to understand which provisions may apply to your situation. We encourage you to speak with your advisor or tax professional to determine your next steps.
1 A non-designated beneficiary is someone who is not a recorded beneficiary on the retirement account, but someone who inherits assets none-the-less.