CARES Act: The Coronavirus Stimulus Law
KNOW WHAT YOU CAN EXPECT FROM THIS NEW COVID-19 RECOVERY ACT
April 13, 2020- The pace of change this year is creating many opportunities for individuals and families to adjust their financial plans. With tax reform, the passage of the SECURE Act in December, the passage of the CARES Act in March, volatile capital markets, lower account values, and potential for lower revenue and income, many assumptions about planning are obsolete. All of these current events can be used as a catalyst to revisit risk tolerance, investment plans, retirement plans, estate planning, insurance and asset protection, cash flow, debt, and business strategy to take advantage of the times. The public health crisis, which has morphed also into an economic crisis, is an opportunity for those who want to benefit from the times. Understanding the CARES Act will be a part of that process.
After several weeks of chaos, the mammoth Coronavirus stimulus bill was signed into law on March 27. While the details and ramifications are still being untangled, this “broad strokes” summary may be helpful. There are significant provisions for small businesses in this law, as well as for individuals. As with any law that is 247 pages long and drafted by several hundred people in just a few days, there will surely be surprises. Here are some of the major components:
For Small Businesses
Payroll Protection Program loans (PPP) – For small business owners (less than 500 employees), including sole proprietors, this loan program will provide the most benefit of any in this new law. Every small business owner should explore this program. Applications can be made through banks that are SBA lenders. The funds are available on a first-come first-served basis. Loans have a 1% interest rate, a term of two years, and payments are deferred for six months. The best part of this program is that the loans are forgivable if used for qualified expenses in the eight weeks after origination of the loan. The forgivable portion is not included in taxable income. The rush for these loans started on Friday, April 3, and most banks declined to take applications from anyone other than their existing business loan customers. Those who have not been able to find a bank that will take a PPP application are welcome to contact us for a referral to a bank that will. The first round of appropriations have already been claimed, and as of this writing, a second round is anticipated.
Economic Injury Disaster loans (EIDL) – While not forgivable, the SBA has significantly loosened the requirements for this loan program during 2020. This is a convenient and inexpensive way to access capital as interest rates are 3.75% with long loan terms. There are many details that accompany this program, and not all businesses should apply. This should be explored if future borrowing costs are expected to be higher than the rate on this loan. Also, there is some interplay with this loan and the PPP that should be understood before applying for both.
Employee retention credit – For small businesses with a 50% reduction in revenue or that were completely shut down by government order, a substantial tax credit may be available for retaining employees in 2020. There are multiple details about this program that should be understood. This credit can be claimed when paying payroll taxes, or by filing a form with the IRS.
Net operating loss rules – The NOL rules are now more lenient. Anyone who has a NOL may want to file amended returns for previous years. This may be beneficial for real estate investors.
Delayed payment of payroll taxes – The employer portion of payroll taxes can now be delayed until the end of 2021 and 2022. This is a significant cashflow advantage for struggling businesses. However, this may not be done if a business accepts a payroll protection loan and any part of the loan is forgiven, for incurred taxes after the date of loan forgiveness.
For Individuals
Recovery Rebates – For individuals, this benefit from the stimulus package is getting the most attention. Qualifying individuals will receive $1,200 per adult plus $500 for each child 16 and under. The income threshold is based on adjusted gross income (AGI) from 2018 unless the 2019 tax return has been filed. The payment phases out for AGIs above $75,000 for single filers and $150,000 for joint filers. If you do not qualify and your income ends up being low enough in 2020, you will receive a payment when you file your 2020 return. The payments will be deposited to the account on record with the IRS from your latest filing. A planning thought - Explore a delay filing your 2019 return if higher income over 2018 will disqualify you. If you have changed bank accounts in the last year, you will need to notify the IRS where to deposit the money.
RMDs Waived — While not getting as much attention as “recovery rebates,” required minimum distributions from retirement accounts are waived in 2020, which may have a significant impact on 2020 tax plans. This includes 2019 RMDs that were allowed to be pushed into 2020. Also, beneficiary RMDs and inherited IRAs RMDs are waived. A planning thought - If you have already distributed your RMD for 2020, you may be able to reverse this with a rollover transaction. There are exceptions to your ability to reverse a transaction, so be sure to understand these details. If you have not yet taken your RMD and do not need the money, suspend automated RMDs and skip the distribution this year. Another planning thought is if skipping RMDs lowers your 2020 tax bracket, this may open up more opportunity for Roth conversions.
Unemployment Insurance — This has been expanded to cover self-employment income, and includes a $600 per week bonus check for four months.
Federal Student Loans — Payments can be waived for six months. For loans that will qualify to be forgiven in the future, the six months of skipped payments will still count towards the forgiveness qualification period.
Charitable Giving — For families who are charitably inclined, there is now a $300 "above the line" tax deduction for gifts to charity. This small amount bypasses the standard deduction. For families who are "bunching" deductions to get around the standard deduction, this will allow for a full deduction of this amount. More substantially, the new law allows for up to 100% of AGI to be given to charity if the donation is made with cash and is not given to a donor advised fund. This may not be the most tax efficient opportunity, but it may apply in narrow circumstances.
No 10% penalty on 401k withdrawals — For those under age 59.5, up to $100,000 can be withdrawn from an IRA for virus related expenses without penalty. The distributions are still taxable. The expenses can be for you or a family member and include income loss from virus related events. This is retroactive to the beginning of the year. The money can be redeposited over three years and/or taxes can be paid over three years. Given market declines for many investors, this should be considered a last resort.
As with all things tax related, strategies that don’t seem to relate to each other sometimes do. It is important to understand not only the components of the CARES Act and how they interact, but also how the elements of your financial plan affect each other. Decisions should only be made in context of the overall situation. The size and complexity of this stimulus package is extensive, and is likely to create an appetite in Washington for higher taxes in coming years, regardless of who wins the presidential election.
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Information presented is for educational purposes only and is not personalized investment, financial, legal, tax, or accounting advice. Nothing on this website should be interpreted to state or imply that past performance is an indication of future performance. All investments involve risk and unless otherwise stated are not guaranteed. Be sure to consult with tax, legal, accounting, and financial professionals about your specific situation before implementing any planning strategies. Investment Advisory Services offered through Timberchase Financial, LLC, a Registered Investment Adviser with the U.S. Securities & Exchange Commission. Registration does not imply a certain level of skill or training.