(9 min read)

The COVID-19 pandemic has radically transformed life in the U.S. National guidance around social distancing, coupled with shelter-in-place orders in many states, has slowed many industries to a grinding halt. School closings, quarantines, and care for family members resulted in crippling burdens for many workers. In this whiplash of abrupt change, many companies are facing indefinite leave, furlough, or even mass layoffs to remain profitable. Moreover, the future remains uncertain, as the healthcare system around the globe struggles to adapt to the rapidly spreading disease.

In response, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion stimulus bill designed to mitigate the economic impact of this pandemic. The law contains relief for struggling workers as well as generous programs to support businesses facing sharp drops in revenue and halted operations. 

Here is a summary of the major provisions along with ideas for planning ahead.

Individual provisions

Recovery Rebates

  • Who benefits: Most Americans, including those with no income and who receive non-taxable benefit programs such as SSI
  • The facts: All U.S. residents with Adjusted Gross Income up to certain limits ($75,000 for individuals and $150,000 for married couples), and who aren’t dependents on someone else’s tax return, are eligible for a full recovery rebate ($1,200 for individuals and $2,400 for married couples). There is also an extra $500 per child under age 17.  This benefit is reduced by $5 for each $100 that AGI exceeds the limits above.  This rebate is an early tax refund for 2020.  As a result, taxpayers who were eligible for a higher rebate based on their actual 2020 income will be “trued up” after filing their 2020 tax returns in early 2021.  Also, excess benefits won’t be “clawed back,” as the IRS will allow taxpayers to keep the higher amount. The Tax Foundation estimates that more than 90% of Americans will receive a recovery rebate.
  • Plan ahead: Most Americans won’t need to take action.  Rebates will be sent using the bank instructions or mailing address used on the 2018 or 2019 tax return, whichever was most recently filed.  If your income had fallen from 2018 to 2019, you may wish to file your 2019 tax return soon to qualify for a larger benefit.  For those outside the limits in 2018/2019 but have seen a large drop in income because of COVID-19, the Pandemic Unemployment Assistance program below can provide access to much-needed funds.

Pandemic Unemployment Assistance

  • Who benefits: Unemployed workers, especially those who traditionally can’t apply for unemployment benefits, and those who require higher benefit amounts for a longer duration
  • The facts: The Pandemic Unemployment Assistance program will now include a wider range of workers under unemployment benefits, including those who traditionally can’t apply (including the self-employed, independent contractors, and those with limited work history).  In addition to state benefits, this program will provide a $600/week benefit for 4 months. It will also cover the first week of unemployment, a period typically not covered by state programs, as well as up to 13 weeks of continuing benefits after state benefits are no longer available.  For those with reduced hours, there will now be a short-time compensation benefit as well.
  • Plan ahead:  As millions across the U.S. face furloughs, layoffs, business shutdowns, and reductions in hours, these provisions aim to provide an economic cushion.  Employers who must furlough or reduce the hours of employees should likewise be aware of these benefits to inform their employees of the available aid.

Pandemic Retirement Distributions & 401(k) Loans

  • Who benefits: Those under age 59 ½ who need emergency access to retirement funds due to the Coronavirus pandemic
  • The facts: The 10% early withdrawal penalty is waived for distributions from qualified retirement accounts of up to $100,000 in 2020.  Any income taxes from the distributions are eligible to be spread over 3 years.  Or, the funds can be rolled back into your retirement account within 3 years to avoid any income taxes.  For 401(k)s, up to $100,000 of vested benefits can be borrowed.  In addition, payments on 401(k) loans can be delayed up to 1 year.  Those qualifying for these distributions must be impacted by Coronavirus, such as those diagnosed, caring for someone diagnosed, or experiencing financial distress from quarantines, furloughs and layoffs, or other reasons related to COVID-19.
  • Plan ahead: While retirement accounts shouldn’t be the first source to access funds, those with a sudden and urgent need can benefit from either a penalty-free distribution or a loan.  Any retirement plan distributions not rolled back within 3 years will still face income taxes.

Charitable Giving

  • Who benefits: The charitably inclined who would like to give more toward Coronavirus-relief or other causes
  • The facts: For 2020, individuals can deduct charitable gifts of up to 100% of income.  These gifts must be made directly to a charitable beneficiary, not to a Donor-Advised Fund or similar charitable vehicle.  In addition, the first $300 of cash contributions will be treated as an above-the-line deduction, meaning that a taxpayer doesn’t need to itemize deductions to benefit.
  • Plan ahead: For those charitably inclined, 2020 is a great year for making a difference.  Charitable gifts can also be used for offsetting higher income in 2020, such as from the sale of a business or property, realized capital gains, or higher earnings.

RMD Holiday

  • Who benefits: Those with required minimum distributions (RMDs) from retirement accounts who don’t need the funds right away
  • The facts: All RMDs required to be taken in 2020, both from personal and inherited accounts, are waived.
  • Plan ahead: This is great news for those who don’t need the funds right now.  RMDs are calculated using year-end values from the previous year (12/31/19 for 2020 RMDs).  With the market pullback, individuals with RMDs would otherwise be forced to take required distributions based on the higher year-end values and sell in their accounts while the market was still low.

Business Provisions

Payroll Protection Program

  • A forgivable loan program for small businesses (up to 500 employees) to cover the cost of payroll, rent, utilities, and other required expenses
  • Maximum interest rate of 4%, loans up to $10M, and 100% guaranteed by the SBA
  • Loans will become available through approved lenders and must be applied for by June 30, 2020

Employee Retention Credit

  • Refundable payroll tax credit that incentivizes employers to avoid layoffs
  • Equal to 50% of wages, up to $10,000 per employee
  • Eligible for companies whose operations were suspended OR gross receipts fell by 50% or more

Other Business-Related Provisions

  • For up to 90 days, owners of multifamily properties are eligible for forbearance on federally-backed mortgages, although during this period landlords are prohibited from legal action to recover a rental unit or charge tenants for nonpayment of rent – those in the real estate business may be eligible for cash-flow relief
  • Delay payment of employer Social Security payroll taxes for 2 years (50% by 12/31/21 and remainder by 12/31/22) – smooths cash flow over the next couple years without penalty
  • Net Operating Losses carried back up to 5 years – allows for additional cash flow from filing amended tax returns by offsetting current losses against previous profits
  • Increase the limitation on business interest expense deduction from 30% to 50% – lowers cost of capital in borrowing by expanding tax-preferential treatment for interest expenses
  • Corporate charitable contributions now deductible up to 25% of AGI – additional tax benefit for charitable gifts and opportunity to offset income from increased sales, realized gains, or other sources
  • Delay of required contributions to pension plans until January 1, 2021– smooths cash flow over the upcoming months; should a company require additional assistance, a temporary plan freeze can provide relief by keeping a plan from accruing additional required contributions

The Coronavirus pandemic has left much uncertainty.  Investors are uncertain about the long-term impact on their portfolios.  Business owners are uncertain about the viability and success of their companies.  Families are uncertain about their jobs, incomes, and retirement.  Even with this environment of uncertainty, however, you can still take control of your financial future.  Contact our office to understand how best to position your portfolio given the risks in the stock market as well as begin a financial plan that protects you and your family, regardless of what the future holds. 

References:

https://www.governmentcontractslawblog.com/wp-content/uploads/sites/108/2020/03/FINAL-FINAL-CARES-ACT.pdf

https://www.governmentcontractslawblog.com/wp-content/uploads/sites/108/2020/03/CARES-Section-by-Section-FINAL.pdf

https://www.kitces.com/blog/analyzing-the-cares-act-from-rebate-checks-to-small-business-relief-for-the-coronavirus-pandemic

Photo by Markus Spiske on Unsplash

The information provided is for educational and informational purposes only. This should not be construed as legal/tax advice. Should you require legal/tax advice, please contact a legal/tax professional in your area.