THE CARES ACT: AN ECONOMIC RESPONSE TO COVID-19
The CARES Act was passed into law on March 27th, 2020 to help address the financial impact resulting from COVID-19. The $2 trillion bill is very broad in its provisions and areas of support, providing significant relief to individuals, businesses, and local government entities.
The following summary is a brief overview of the changes we believe will have the greatest impact on Bigelow’s clients. As always, please consult your tax and legal professionals before acting on any general information. Like any new law, there will be ongoing review and interpretation over time, with new information and detail presented in the future. The information provided below is an overview of our understanding of the CARES Act as of April 3rd, 2020.
DIRECT PAYMENTS TO INDIVIDUALS
Individuals should expect to receive payments of $1,200, married couples should expect to receive $2,400. This will be increased by $500 for each qualifying child. Payments will be reduced for individual filers that have adjusted gross income higher than $75,000, or married couples that have adjusted gross income above $150,000. Payments will be phased out entirely above $99,000 (individuals) and $198,000 (couples without qualifying children) entirely. Tax information from previous years will be reviewed in determining AGI.
The payments are considered refundable income tax credits. Like other refundable credits, they will not be considered taxable income.
The CARES Act will follow the standards for the Child Tax Credit in determining payments made for qualifying children. Individuals can not be claimed as a dependent and must have a social security number in order to receive the credit.
ELIMINATION OF RMDs in 2020
Required Minimum Distributions do not need to be taken in 2020. This provision is broad and affects IRA accounts as well as 401(k) plans and other types of retirement accounts. This temporary waiver also applies to the first RMD, if an individual elected to defer their 2019 RMD to 2020.
*Please contact your Bigelow advisor if you’d like to suspend your required minimum distribution for the year.
You do not need to ‘make up’ the distribution next year.
CHARITABLE CHANGES: ‘ABOVE THE LINE’ DEDUCTION AND RELAXED LIMITS
Most tax filers claim the standard deduction rather than itemize their tax deductions. A new $300 deduction for making qualified charitable cash contributions is taken ‘above the line’ of adjusted gross income, regardless of whether that tax filer itemizes their other tax deductions. This is helpful for filers that claim a standard deduction and have plans to donate $300 or more in cash to qualified charities in 2020.
The CARES Act also changes the “60% of AGI maximum” for cash contributions made to charity to “100% of AGI for qualified contributions.” This is worth a conversation with your tax professional for individuals that have charitable intentions in 2020.
PENALTY-FREE EARLY DISTRIBUTIONS FROM RETIREMENT ACCOUNTS
Qualifying individuals that are affected by the coronavirus can withdraw up to $100,000 from most retirement plans, such as IRA accounts, 401(k) plans, 403(b) plans and some 457(b) plans, without the typical 10% penalty for taking an early distribution. The tax owed on the distribution can be spread ratably over a three-year period, and individuals have some flexibility in being able to recontribute these funds back to a retirement account within three years.
In order to qualify, the distribution must be taken before December 31, 2020. The individual must certify that they (or their spouse or dependent) were infected by COVID-19, as determined by a CDC-approved test. An individual may also qualify if they certify that they experienced certain adverse financial consequences related to COVID-19, such as being furloughed or quarantined.
HUGE BOOST FOR SMALL BUSINESSES
The programs designed to benefit small businesses are substantial and will not be reviewed in their entirety in this article. However, many of our clients are self- employed and should be aware of some important new programs that were recently created. These programs are first-come first-served, so prompt filing of applications is important.
Paycheck Protection Program (PPP) Loans will be funded by a $349 billion pool of funds to provide forgivable loans to small businesses, typically with a maximum of 500 employees. The application window opened on April 3rd, 2020 and applications should be submitted through an SBA lender, not directly with the SBA. Loan amount limits are generally limited to a company’s average monthly payroll multiplied by 2.5, capped at $10 million. Payroll costs beyond $100,000 per individual per year cannot be included in the calculation. If a company maintains its workforce (headcount and wages), the SBA will forgive the portion of the loan proceeds that are used to pay for the next eight weeks of payroll costs, mortgage interest, rent, and utilities, provided that 75% of the proceeds went towards payroll costs. Payments are deferred for six months and there are no SBA or lender fees. A company that applies must certify in good faith that the loan proceeds are necessary to support ongoing operations of the company given the uncertainty of economic conditions and that the funds will be used to support payroll and essential costs, such as mortgage interest rent or utilities. The borrower cannot have a duplicative application pending, or receive a duplicative SBA loan from February 15, 2020 through December 31, 2020.
Economic Injury Disaster Loans and Loan Advance (EIDL) will help businesses secure capital quickly directly through the SBA. This is a smaller program, capped at $10 billion in the total pool, with no more than $2 million going to a single entity. No bank application is necessary. To qualify, businesses, including sole proprietors, must have been adversely impacted by COVID-19. Proceeds should be used to pay for operating expenses that the business would have been able to cover through revenues, had COVID-19 not disrupted their business. Proceeds should not be used to replace profits or expand the company. EIDL applicants can request an emergency grant of $10,000 that does not need to be repaid, even if their loan application is subsequently denied. The application is simple, and the emergency grant funds may be available within three days of application.
BOOST TO UNEMPLOYMENT INSURANCE
The recent laws will provide state incentives to eliminate the one-week waiting period prior to filing claims. The Pandemic Unemployment Insurance program will also provide an additional $600 per week supplement to a state’s typical unemployment payment for four months. Those who are typically unable to file for unemployment, such as the self-employed or gig workers, may find that they qualify.
Unemployment insurance claims are generally processed at the state level. At this point in time, most states are still scrambling to keep up with the recent federal changes to the unemployment insurance system. As of April 3rd, Maine’s Bureau of Unemployment Compensation still has not fully adopted the federal boosters and is discouraging certain newly eligible individuals from applying. Retroactive payments are being promised.
Payments on federal student loans will be suspended for six months. Interest is waived during this period. For the purpose of considering loan forgiveness programs, the payments will be recorded as though they had been made in the six-month window.
There will also be some emergency financial aid made available to certain students, and an effort will be made to pay students participating in certain Federal Work-Study programs who were unable to complete their work.
Federal income tax payments and filing will be pushed back to July 15th. Many states, such as Maine, have followed suit on this change.
Mortgage relief is also included in the package. Servicers of federally backed mortgages will accommodate borrower requests to postpone payments.