On March 27th, 2020 President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act was passed as part of “Phase 3” of Congress’s response to the unprecedented impact COVID-19 has had on the US economy. Below is a summary of some of the biggest provisions to impact most individuals and business owners.
1. $1,200 check to individuals who make less than $75,000, married couples making less than $150,000 AGI. Head of Household up to $112,500. $500 per child 16 years old or younger.
a. Will be based on 2019 tax returns if you filed, and 2018 returns if you haven’t filed yet.
b. Phased out by $5 for every $100 earned above threshold. Fully phased out at $99,000 individual, $198,000 couple.
c. but it’s important to understand that any payment you receive acts as an advance payment of a credit you will compute AGAIN on your 2020 tax return. What that means is that when 2021 rolls around and you prepare your 2020 tax return, you’ll have to recompute the amount you’re owed based on 2020 data.
2. $250 billion to expand unemployment insurance to more workers and lengthen the duration up to 39 weeks. Federal unemployment will pay a maximum of $600 per week on top of what employees receive from state unemployment. Sole proprietors and other self-employed workers can also qualify.
3. $349 billion in loans will be made available to small businesses (less than 500 employees). Any of the money spent on rent, payroll and utilities becomes a grant that does not need to be paid back. Interest rate up to 4%. Loan amount is determined based on the previous year’s average monthly payroll multiplied by 2.5. If the business uses the loan funds for the approved purposes and maintains the average size of its full-time workforce based on when it received the loan, the principal of the loan will be forgiven, meaning the company will only need to pay back the interest accrued.
a. Would cover 6 weeks of payroll, capped at $1,540 per week, per employee.
4. Payroll tax credit available for employers who continue to pay employees throughout the crisis. A business is eligible one of two ways:
a. The operation of the business was fully or partially suspended during any calendar quarter during 2020 due to orders from an appropriate government authority resulting from COVID-19, or
b. The business remained open, but during any quarter in 2020, gross receipts for that quarter were less than 50% of what they were for the same quarter in 2019. The business will then be entitled to a credit for each quarter, until the business has a quarter where it’s recovered sufficiently that its receipts exceed 80% of what they were for the same quarter in the previous year.
c. For each eligible quarter, the business will receive a credit against its 6.2% share of Social Security payroll taxes equal to 50% of the “qualified wages” paid to EACH employee for that quarter, ending on December 31, 2020. The business’s qualified wages depend on its size; if there were more than 100 employees during 2019, the qualified wages are limited ONLY to those wages that were paid by the employer during the quarter for the period of time the business was shut down. If there were less than 100 employees for 2019, however, qualified wages include not only those paid to employees during a shut-down, but also wages paid for each quarter that the business has suffered a sharp decline in year-over-year receipts, as described in #2 above.
5. Can defer the payment of payroll taxes until 2021 and 2022 (50% of 2020 tax due in 2021, remaining 50% due in 2022).
a. You cannot claim both the credit and defer payment. It is one or the other.
6. NOL restrictions will be loosened for most businesses
a. Losses from 2018, 2019 and 2020, will be permitted to be carried back for up to five years. As was previously the case, a taxpayer will be permitted to forgo the carryback, and instead carry the loss forward.
b. Losses carried TO 2019 and 2020 will be permitted to offset 100% of taxable income, as opposed to 80% under the TCJA.
7. The CARES Act allows an individual to make a cash contribution of up to $300 made to certain qualifying charities and deduct the contribution “above-the-line” in computing adjusted gross income. Thus, the taxpayer receives the deduction in addition to the standard deduction. This above-the-line deduction is here for 2020 and beyond, but is available only to a taxpayer who does not itemize their deductions.
8. The CARES Act allows a taxpayer to take a “coronavirus-related distribution” of up to $100,000 in the year 2020 free from penalty from a qualified retirement plan (most IRA’s). A “coronavirus-related distribution” is a distribution made during 2020:
a. To an individual who is diagnosed with SRS-COV-2 or COVID-19 by a test approved by the CDC,
b. whose spouse or dependent is diagnosed with one of the two diseases, or
c. who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of child care.
d. While the distribution escapes the 10% penalty, it doesn’t escape the income tax. The Act, however, allows the taxpayer to spread the income over a 3-year period beginning with 2020. The taxpayer also has the choice to avoid any income recognition by repaying the distribution to the retirement plan within three years of receiving it.
e. For those required to withdraw a “required minimum distribution” from their retirement plan in 2020, the CARES Act temporary waives the requirement for this year only.
The CARES Act is the largest economic relief bill passed in U.S. History and has a wide-ranging impact on both individuals and small businesses. Please let us know if we can be of any help to you or your business.