As we all learn to live with the impact the coronavirus is having on our daily lives, recent legislation and relief from the federal government seeks to alleviate the financial impact of COVID-19. The most significant piece of legislation is the Coronavirus Aid, Relief and Economic Security Act. The CARES Act, which was signed into law on March 27th, provides over $2 trillion dollars in relief to individuals and businesses. We will summarize the key provisions of the CARES Act, Families First Coronavirus Response Act (FFCRA) and other relief measures below.
CARES Act – Recovery Rebate Checks
Taxpayers with adjusted gross income (AGI) of $75,000 ($150,000 for married couples filing jointly) will receive a recovery rebate check up to $1,200. Married couples will receive $2,400. An additional $500 will be paid for each qualifying child. The check amounts will be reduced for higher income levels and will be eliminated when AGI exceeds $98,000 ($198,000 for married filing jointly).
The checks represent an advance of a refundable federal income tax credit. If you have filed your 2019 return already, your amount will be based on your 2019 tax return. If you have not filed your 2019 return, it will be based on your 2018 tax return. A reconciliation of the credit amount will be completed when you file your 2020 income tax return.
CARES Act – Other Key Provisions for Individuals
- Retirement Account Distributions – 10% Early Withdrawal Penalty Waived
COVID-19 related distributions up to $100,000 from qualified retirement accounts (IRA, 401(k), etc.) will be exempt from the 10% early withdrawal penalty. Federal income tax on these distributions will be payable evenly over 3 years (2020, 2021 and 2022) unless a taxpayer elects to have all the income taxed in 2020. These distributions may also be repaid over a 3-year period, which starts the day after the distribution is received. If the distribution is repaid, it is not subject to income tax.
- Most 2020 Required Minimum Distributions Waived
The CARES Act also eliminated required minimum distributions (RMD’s) for certain defined contributions plans and IRAs. This includes inherited IRAs and inherited Roth IRAs. Required minimum distributions for Cash Balance Plans and define benefit plans remain in place. If you have already taken your 2020 RMD, there are options to refund the distribution to your account. However, most beneficiaries of inherited IRA’s and Roth IRA’s will not be able to refund their distributions.
- Changes to Charitable Contribution Deductions
Under the CARES Act, individuals may deduct up to $300 of cash contributions to a public charity even if they take the standard deduction on their federal income tax return. In addition, the limitation on cash contributions to public charities for individuals who itemize deductions has been waived for 2020.
- Increased Unemployment Benefits
An individual that becomes unemployed (fully or partially) prior to December 31, 2020 may see unemployment benefits increased by $600 per week.
CARES Act – Key Business Provisions
- Funding Relief
The CARES Act increased the statutory loan limit for small businesses (less than 500 employees) to $10,000,000. This increase will remain in effect until December 31, 2020. The U.S. Small Business Association was also authorized to provide paycheck protection loans to small business owners. These loans may be forgiven in an amount equal to the sum of payroll, mortgage, interest, rent and utility costs incurred between February 15, 2020 and June 30, 2020. The U.S. Chamber of Commerce has shared a summary and checklist here.
- Employee Retention Credit
Qualifying employers whose operations were fully or partially suspended, or whose gross receipts declined by 50% when compared to the same quarter in the prior year, are eligible to receive a refundable payroll tax credit. The credit is equal to 50% of qualifying wages paid to employees between March 13, 2020 and December 31, 2020. The credit is allowed on the first $10,000 of wages paid to an eligible employee. If an employer participates in the SBA loan forgiveness program, they are not eligible for this credit.
- Deferred Payroll Tax Payments
Qualifying employers and self-employed individuals may defer payment of the employer share of Social Security tax incurred between March 27, 2020 and December 31, 2020. Half the amount due is payable on December 31, 2021 and the other half is due on December 31, 2022. Like the Employee Retention Credit, this deferral is not available to employers who participate in the SBA loan forgiveness program.
- Modified Charitable Contribution Limitation
Corporations may now deduction charitable contributions up to 25% of their taxable income. The limit was 10% previously.
- Relaxed Business Interest, Excess Business Loss and Net Operating Loss Limitations
These limitations were imposed or modified by the Tax Cuts and Jobs Act of 2017 (TCJA). They have been relaxed to provide businesses with increased after-tax cash flow. Business interest expense previously limited to 30% of adjusted taxable income is now limited to 50% of that amount in 2019 and 2020. The excess business loss limitations for non-corporate taxpayers are now effective for taxable years beginning after December 31, 2020. Finally, the NOL rules have been temporarily modified to allow losses from 2018, 2019 or 2020 to be carried back five years. The rule limiting NOL’s to 80% of taxable income is removed for taxable years beginning before January 1, 2021.
Family First Coronavirus Response Act (FFCRA)
This was the first piece of legislation passed in response to COVID-19. The legislation includes paid leave requirements for certain employers (mostly those with fewer than 500 employees) and payroll tax credits to help subsidize the cost of the requirements on the employer. On March 27, 2020, The IRS confirmed that the tax credits related to qualified sick leave wages apply to wages paid between April 1, 2020 and December 31, 2020. The Department of Labor has shared additional guidance on FFCRA here.
We have previously summarized the various tax filing and payment deadlines extend by the IRS and state governments. You can access that summary here. In addition, the IRS stated on March 27, 2020 that the filing and payment of gift taxes has also been extended to July 15, 2020.
Disclaimer: This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors