Coronavirus Aid, Relief, and Economic Security (CARES) Act
The Senate and House has passed the CARES Act, sending it to the President for final approval. Provisions include rebates to individuals, small business loans, forgiveness of loans, additional unemployment benefits, and assorted tax breaks. As a resource, here is a breakdown for certain aspects of the CARES Act that we feel are most meaningful to our clientele.
Probably the most well known aspect of the CARES Act is the individual payment, officially known as “2020 Recovery Rebates for Individuals”. This provides eligible taxpayers a direct deposit or check for $1,200 if single ($2,400 if married, filing jointly) plus $500 for each dependent child under the age of 17. The payments will be reduced for singles with an adjusted gross income (AGI) over $75,000 ($150,000 if married, filing jointly). The payment will be reduced by $5 for every $100 your AGI exceeds those thresholds. The basis for determining the income will first be your 2019 tax returns. If your 2019 returns are not yet filed and processed, then the IRS will be looking at your 2018 returns. If for some reason you did not file either year, but collected Social Security, eligibility will be based on your Social Security Benefit Statement.
It’s also important to know that any payment you receive will actually be considered an advance payment. When your 2020 tax returns are completed next year in 2021, a computation will be made to compare the amount of credit you should be allowed compared to the actual amount received. If the computation results in an amount greater than what you received, a credit will be applied against your 2020 taxes and reduce your liability. As of now, there is no mention within the CARES Act to require a repayment if the computation on next year’s return results in less than the amount you actually received.
These are the basics and apply to most individuals. If one does not receive a check or direct deposit due to not filing a 2018 or 2019 return and does not receive Social Security Benefits, then we recommend filing a 2020 return next year to claim the credit in that manner.
To summarize, most everyone below the thresholds mentioned earlier will receive advanced payments as a result of the CARES Act. The payments are not yet scheduled, but plans are being made to begin after the first full week of April. However, there are indications that the payments may begin later in April and possibly into May.
Retirement Account Funds:
The rules that require a withdrawal of the “required minimum distribution” (RMD) for 2020 have been suspended. RMDs are waived for this year only.
You can also take a penalty-free “coronavirus-related distribution” up to $100,000 (to a diagnosed individual; to someone whose spouse or dependent is diagnosed; or someone who suffers financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, or unable to work due to lack of child care). The CARES Act allows you to spread the income over three years, or you’ll be able to choose to repay the distribution within a three year period and avoid any income recognition.
Extended to those not traditionally eligible (self-employed, independent contractors, and others) and unable to work due to issues related to COVID-19. Benefits are being extended to 39 weeks from 26. The state-calculated benefits will be increased by $600.
There is a new deduction allowed to those who do not itemize deductions. For those that claim the standard deduction, a maximum amount of $300 may be claimed in addition to the standard deduction if contributing to a qualifying charity.
For 2020 only, the limits for charitable giving are relaxed. For those that itemize, contributions up to 100% of AGI may be deducted, with any excess deductions available to be carried over to the next five years. After 2020, the limits for charitable giving will return to 60% of AGI.
Loans and Forgiveness of Repayment:
Paycheck protection loans for businesses with fewer than 500 employees are fully guaranteed by the federal government through December 31, 2020. The eligible loan amount will be based on two and a half times the average monthly payroll costs when looking back at the previous twelve months from the time of the loan. Payroll costs take into account gross wages, commissions, salaries, etc., and other assorted payments, including payments to independent contractors. There are some restrictions and limitations, but most businesses and not for profits are expected to qualify for some amount.
There is also a provision related to the loans indicated above where repayment of the loan will not be required and forgiveness of debt will be allowed. If qualified, the forgiveness will not be considered taxable income. Forgiveness of repayments will be directly related to payroll costs, rent, mortgage interest and certain utility payments made by the small business during the eight week period following the receipt of the loan proceeds. There may be limitations, but most of the businesses and not for profits that qualify for the loan will be able to take advantage of this forgiveness of repayment in some manner.
Payroll Tax Credits/Refunds:
There is a provision for delaying the payment of the employer’s share of the social security tax (6.2%) that would normally be due from date of the CARES Act through December 31, 2020. Those liabilities could be accrued and payments would then be made by splitting 50-50 on December 31, 2021 and December 31, 2022. This would not be allowed for those employers that took out a payroll protection loan that was forgiven (see above).
Employee Retention Credits:
There is also a one-year credit available against the employer’s share of social security taxes (6.2%). This is for businesses that are forced to suspend or close their operations due to COVID-19, but continue to pay their employees during the shutdown. There are several considerations based on certain eligibility requirements. As with the Payroll Tax Credits/Refunds above, this credit would not be allowed for those employers that took out a payroll protection loan that was forgiven (see above)
There are other aspects to the CARES Act as mentioned in our opening. However, at this time, we feel that the topics mentioned above have the most influence on our family of clientele. This is simply the beginning of a new set of rules available to all of us.