CARES Act – Coronavirus Aid, Relief, and Economic Security Act
U.S. Government Provides Relief to Individuals, Businesses in Midst of COVID-19 Crisis
On March 27, President Donald Trump signed into law a historic $2 trillion stimulus package designed to provide economic relief to individuals and businesses affected by the coronavirus pandemic.
Our aim in this alert is to give a brief overview of both the tax and non-tax provisions of the government’s new stimulus legislation, including what type of assistance is available for individuals and businesses, how to apply for it, and what to do if you become unemployed. The summary is divided into two sections, one for individuals and one for businesses.
Stimulus Payments: Amounts and Eligibility
- Most adults will receive $1,200; each qualifying child under 16 years old will receive $500.
- The amount you receive is based on your tax filing status and reported adjusted gross income (AGI).
- Single filers with an AGI of $75k or less will receive the full $1,200; with a full phase-out at $99k
- Married filers with an AGI of $150k or less will receive the full $2,400; with a full phase-out at $198k
- Heads of households with an AGI of $112.5k or less will receive the full $1,200
- Having qualifying children will increase the phase-out threshold slightly for all groups
- Those claimed as a dependent by another taxpayer will not receive any stimulus money
- Recipients need to have a legitimate Social Security number to receive payment, except for military members
- Currently there is only one stimulus payment scheduled; however, there has been discussion of additional future payments
Proof of Income
- If prepared, your 2019 tax return is the basis of your eligibility; if not, use your return from 2018
- If you still have not filed for 2018, you can use a 2019 statement from the Social Security administration as proof of income to qualify
Applying for the Payment and Receipt
- If the IRS has your bank information from prior tax filings, then you don’t need to do anything. The money will simply be direct deposited into your account based on already filed income tax information
- Most people should expect to receive the money approximately three weeks from the bill’s passage date
- Unemployed persons are eligible to receive payments
- You will not need to pay income tax on these payments
- Generally, this payment is exempt from all forms of wage garnishment; however, not in all cases for child support garnishments
Unemployment Benefits: Who is Covered?
- The bill expands eligibility for unemployment benefits, including part-time and self-employed workers
- Self-employed persons are newly eligible for unemployment benefits and their benefit is calculated based on previous income using a formula from the Disaster Unemployment Assistance program
- Part-time worker benefits are state dependent
Amount of the Benefit
- Unemployment benefits still vary by state, but generally the bill aims to compensate for the average worker’s paycheck by providing extra payments to cover the gap between traditional state unemployment and actual wages
- Eligible workers can get as much as $600 per week in addition to their state benefit; this includes self-employed and part-time workers
- States are free to pay the whole amount at once or send the top-up portion separately
How Long Will It Last?
- The bill provides an additional 13 weeks on top of whatever each state already provides; however, unemployment benefits cannot last more than 39 weeks total
- Those already receiving unemployment benefits are still eligible for the 13-week benefit extension as well as the $600 weekly benefit top-up
- The incremental $600 payment is only good for up to four months, through the end of July
- Coverage also extends to those who can’t work because they are required to self-quarantine and people unable to travel to work because of imposed quarantine restrictions
- If the main household earner dies as result of the coronavirus, the survivor is eligible for their unemployment benefit
- People who can work from home or are already receiving paid sick or family leave are not eligible
- For six months (April 2020 to September 2020) there is an automatic suspension of student loan payments for loans held by the federal government (private loans excluded)
- You may choose to keep paying down the principal if you desire
Retirement Account Rule Changes
- For 2020, the minimum distribution requirements on IRAs, 401(k), 403(b) plans, etc. are suspended
- This is not applicable to pensions
- Up to $100k may be withdrawn early without being subject to the typical 10 percent early withdrawal penalty; and income taxes owed on withdrawals may be spread over three years from the date of distribution
- To qualify for these exemptions, you need to prove the need was related to the COVID-19 outbreak, which includes if you, your spouse or a dependent tested positive for the virus or if you suffered adverse economic costs due to the COVID-19 crisis
- Loan limits on workplace retirement plans (401k, etc.) are doubled, allowing participants to take loans of as much as $100k if they can prove they’ve been affected by the pandemic
- The bill creates a new charitable deduction of up to $300 available for those who can’t itemize their deductions for donations to qualified charities
- The limit on charitable deductions (those that are itemized) are increased, allowing donors to deduct up to 100 percent of donations against 2020 AGI. For example, if you have $1.3 million in income, you can donate $1.3 million and deduct the entire amount
- Only cash gifts to public charities qualify; you cannot donate stocks or gift via private foundations to be eligible
Miscellaneous Provisions: Renter’s Relief
- The law puts a temporary 120-day nationwide stop to evictions if the landlord has a mortgage from a governmental agency, such as Fannie Mae, Freddie Mac and others. Additionally, landlords are not allowed to charge penalties for delinquencies during this period.
- The 10 percent limitation on charitable donations is increased to 25 percent of taxable income
Qualified Property Improvements
- Businesses will have the option to write off costs that are typically only depreciable over a 30-year period, especially businesses in the hospitality industry
Small Business Administration (SBA) Loans
- Small businesses and non-profits that have 500 employees (full- and part-time) or fewer are eligible to receive SBA loans of up to $10 million
- The loans may be used to cover the cost of payroll, paid leave, group health benefits, mortgage and rent payments, utilities and interest on other debts
- No collateral or personal guarantees are required
Employee Retention Credit
- Employers are eligible for a payroll tax credit of up to 50 percent of wages paid during the COVID-19 crisis, which is defined as March 13, 2020, through the end of the year, up to a maximum credit of $5,000 per employee
- The credit is limited to employers whose operations have been suspended due to the virus outbreak or whose gross receipts have fallen by more than 50 percent compared to the same quarter in the prior year
Payroll Tax Deferral
- Employers can defer their 6.2 percent portion of the FICA tax (Social Security portion only), delaying payment over two years with 50 percent due in 2021 and the other 50 percent due by 2022.
Net Operating Loss (NOL) Changes
- The Tax Cuts and Jobs Act disallowed the carryback of NOL completely; and before this in 2018, only a two-year carryback was allowed. This bill allows a five-year carryback for losses from 2018, 2019 and 2020; and taxpayers can amend prior year’s returns as well.
- The 80 percent limit on NOLs for these same years is removed, allowing a 100 percent reduction in taxable income.
Business Interest Expense Deductions
- Business interest that falls under Section 163(j) gets an increased deduction limit from 30 percent to 50 percent of taxable income for 2019 and 2020.
- 2019 taxable income can be used to calculate the interest limitation for 2020 if it’s more favorable
- The above is not applicable to partnerships