The president signed into law the Coronavirus Aid, Relief and Economic Security Act, known by its acronym the CARES Act, on March 27, 2020. This is a $2.2 trillion-dollar economic stimulus package, meant to cushion the economic blow from the Covid 19 virus-containment policies. The Act includes direct payments to individuals, assistance to small businesses and large corporations, aid to States and municipalities, and $180 billion for hospitals and other public-health purposes.
The CARES Act is an 880-page piece of legislation. This article will provide some perspective on the major provisions impacting Individuals as well as the aid to businesses, state and local government. Please consult with your tax advisor, CPA, and other financial advisors before acting on any of the provisions discussed below.
INDIVIDUALS
1. The IRS has delayed the tax filing deadline to July 15th, and the state of California has also extended to July 15. July will also be the new deadline for making contributions to retirement accounts such as IRAs, Roth IRAs and SEP accounts for the 2019 tax year. Of course, if you are due a refund, file at your earliest convenience as the deadline extension does not impact the payment of refunds. For those making estimated payments, first quarter estimated taxes for 2020 is also deferred to July 15th. However, second quarter taxes are STILL due June 15. So, as of this writing, second quarter estimates are due BEFORE the first quarter payments.
2. Required minimum distributions (RMDs) from retirement accounts are waived for 2020. RMD amounts are calculated based on the value of the account on the last day of the previous year. Because most accounts have seen a decline this year, the amount of the required withdrawal would have been a much larger percentage of a retiree’s account. Congress recognized that and will allow retirees to keep that money in their accounts, potentially recouping some of the market losses when the economy turns around. No retiree will have to take an RMD from either an IRA or a 401(k)-type plan this year. This also applies to beneficiaries and to those who turned 70 ½ in 2019 and were delaying their initial distribution till 2020.
3. Rules regarding Charitable Contributions have also changed, allowing taxpayers to benefit from making larger charitable contributions this year. Deductions for cash donations were previously limited to 60% of a taxpayer’s adjusted gross income. A simple example, if your adjusted gross income were $100,000, you could deduct charitable donations of cash up to $60,000 i.e. 60% of $100,000. The CARES Act has suspended this limitation, meaning for the 2020 tax year, individuals can deduct any cash contributions made to qualified charitable organizations, up to 100% of their adjusted gross income (AGI). Continuing with the same simple example, if you made $100,000 and donated $100,000 cash to a charity, you have completely offset your taxable income. If you were to make charitable donations in excess of your income, those deductions can be carried forward for 5 years. There is an additional provision for smaller donors as well. For those who take the standard deduction on their tax return, they can claim a brand new “above-the-line” deduction of up to $300 for cash donations to charity in 2020, extending the $300 write off for those who do not itemize deductions.
4. Penalty Free Retirement Withdrawals – Consistent with past disaster-related legislation, early-withdrawal penalties on coronavirus-related distributions from retirement accounts up to $100,000 will be waived. Additionally, tax payments on distributions can be spread out over three years or individuals could return distributions to the retirement account over three years. It is important to realize that just because you can make a withdrawal does not mean you should take one. The tax implications are potentially significant. Individuals should only use this option as a last resort. Consider other potential sources of funds before withdrawing from your retirement savings.
5. Regarding mortgage assistance, the rules are far from uniform and vary from state to state. The best advice is to contact your specific lender to discuss any accommodations. The Federal and California state programs delay payments for certain mortgages, but do not forgive the obligation. It is called forbearance; it is an agreement that suspends or defers payments to some point in the future when they will be paid either via lump sum or added to the end of the mortgage. It is clear that lenders – car loans and leases, credit cards, student loans – are working with consumers during this unprecedented time.
6. We have all heard about the Direct Payments the government is sending eligible individuals. Those who qualify can expect to receive $1,200 dollars or $2,400 for married couples filing jointly plus an additional $500 for each dependent under the age of 18. For unmarried individuals, the credit begins to phase out if you have an adjusted gross income greater than $75,000 and for married couples it doubles starting at $150,000.
Hear are a few other provisions of the CARES Act:
1. There is relief for students, deferring loan and interest payments through Sept. 30 without penalty for all federally owned student loans.
2. Unemployment Insurance processing has been expedited and benefits increased. The bill eliminates waiting periods, so unemployment benefits reach affected workers more quickly. In many states, the application process can be done from home, online, or via telephone. And the federal government is providing additional unemployment benefits and increasing the length of time those benefits can be received. And, to adapt to our changing economy, benefits to self-employed workers, independent contractors, and, for the first time, Gig economy workers are eligible, such as UBER drivers, food delivery services, and pet walkers.
3. COVID-19 Tests will be covered 100% by medical insurance and there is a reauthorization of grant programs that promote the use of telehealth technologies.
BUSINESSES, STATES AND LOCAL GOVERNMENTS
We will start by reviewing assistance for small businesses, that is businesses with 500 or fewer employees. About half of all Americans work in companies with under 500 employees, and it is these small businesses that have been hit hardest by restrictions in place in so many parts of the country. Extending cash and credit to these businesses is critically important because many have little or no cash cushion and limited access to credit. I want to describe two of the main supports for small businesses.
1. The Small Business Administration’s (SBA) Economic Injury Disaster Loans (EIDLs) are the first line of support. These loans are not new. They have always been available in the event of disaster, but this is the first time a virus or pandemic event has been defined as a disaster. $10 billion dollars has been allocated for emergency grants. These are nearly instant grants, approved within three days for eligible entities, providing emergency funds to cover immediate operating costs. The cash advances can be forgiven if used for paid leave, maintaining payroll, and mortgage or lease payments.
2. $350 billion has been allocated for the Paycheck Protection Program (PPP). This program provides loans of up to $10 million per business impacted by the economic downturn. The loan is limited by a formula tied to payroll costs, covering employees making up to $100,000 per year, the term is 2 years, and the interest rates are as low as 0.5% interest. Best of all for small businesses, these loans can be completely forgiven if a firm uses the loan for payroll, interest payments on mortgages, rent, and utilities provided employees are retained according to specific measures, thus the name “Paycheck Protection Program.”
These programs are available to 501(c)3’s as well such as non-profits, charitable organizations, and religious institutions.
With regards to large corporations, $500 billion has been allocated to provide loans, loan guarantees and other investments.
1. Almost $50 billion is earmarked for passenger air carriers and related businesses, cargo air carriers, and businesses important to maintaining national security.
2. $454 billion is available for loans, loan guarantees, and investments to eligible businesses. For corporations who receive a government loan, there are stipulations about stock buybacks and limitations on executive bonuses. These loans will not exceed five years and, unlike the small business loans, cannot be forgiven.
There are several other provisions designed to provide financial resources to businesses to help weather this pandemic:
1. Employers can delay payroll tax deposits for 2020 with 50% due by December 31, 2021, and the other 50% by December 31, 2022.
2. Subject to certain limitations, congress has provided a refundable employer retention credit equal to 50% of qualified wages which can be used to offset quarterly employment taxes.
3. Net operating losses (NOL) can be carried back five years and the act temporarily removes the taxable income limitation to allow an NOL to fully offset income. This is designed so businesses with financial problems can file for tax refunds from the carryback years when they were profitable and had paid income taxes.
4. Enables businesses (particularly retail establishments, restaurants, and hotels) to immediately write off costs associated with improving facilities instead of having to depreciate those improvements over time.
The bill includes $150 billion earmarked for direct aid to the states.
1. Each states will each receive at least $1.25 billion in aid, and that number will rise depending on the population of each state. Presumably, states would use those funds instead of having to issue bonds to fill budget gaps.
2. The $454 billion mentioned earlier can also be loans to support states or municipalities. Additionally, the size of the Federal Reserve’s authority to provide loans and other support to states and municipalities should help some states and municipalities address financial pressures, potentially lowering borrowing costs.
As previously mentioned, the Cares Act is over 800 pages long. We have yet to review Division B of the ACT, the Emergency Appropriations for Coronavirus Health Response and Agency Operations, which contains $330 billion in new funding for:
1. Hospitals, Medicare and Medicaid enrolled suppliers.
2. $16 billion to replenish the Strategic National Stockpile.
3. Support for research and development of vaccines, therapeutics, and diagnostics to prevent or treat the effects of coronavirus. And Funds to support the Centers for Disease Control.
4. $30 billion designated to provide emergency support to local school systems and higher education institutions.
5. Doubles the funding for FEMA.
6. $25 billion for food assistance, including nearly $16 billion for the Supplemental Nutrition Assistance Program (SNAP) and nearly $9 billion for child nutrition.
We hope you have gained a better understanding of some of the specific measures of the CARES Act that may impact you or your business, and also hope you have learned more about the depth and scope of the Act, beyond the broad sweep of the headlines.
If you have any additional questions Avitas Wealth Management is here to help. Please contact us and a representative will be in touch with you.