IMPORTANT – Summary of Tax and Loan Provisions in CARES Act Signed on Friday, March 27!
Some Good News for Many Individuals and Organizations Resulting from COVID-19
On Friday, March 27, the President signed the $2.2. trillion “Coronavirus Aid, Relief, and Economic Security Act” also called the “CARES Act”. This is a huge, new spending bill that will provide relief to individuals, businesses, certain not-for-profit organizations, the health care system and seriously impacted industries such as the airlines.
Our Greenwalt team has gathered the resources to help our clients understand the provisions that apply to them and then guide them toward these opportunities as more details on the process become available. Today, we share some of the highlights of the Act that will impact the largest groups.
Individuals – Cash Payments to be Received
Depending on the amount of adjusted gross income (AGI), tax filers will receive a one-time “recovery rebate”, or “advance refund” of a 2020 tax credit. The amount is $1,200 for individual and $2,400 for joint filers. The full credit is available to individuals with AGI of $75,000 or less, heads of household of $112,500 or less and joint filers with AGI of $150,000 or less. Filers also are eligible for $500 for each qualifying child (16 years or younger). These credits, including for children, are reduced for filers with AGI in excess of those levels and will not be available to individuals with AGI higher than $99,000, heads of household of $148,500 or more or joint filers greater than $198,000. These payments will be calculated based on your most recently filed personal return (either 2019 or 2018) and are to be received between now and the end of December (some estimate that these checks or direct deposits to accounts on record with the IRS could begin to arrive in the next few weeks). For those on Social Security that do not file tax returns, the amount will be determined based on your Social Security Benefit Statement (Form SSA-1099)
Individuals – Distributions from Qualified Retirement Plans
If a taxpayer, their spouse or dependent are diagnosed with the COVID (or SARS-2) disease, they can withdraw up to $100,000 from their retirement plan any time in 2020 and be exempt from the 10% “penalty tax on early withdrawals for those not yet 59 1/2” and the income can be taxed over 3 years rather than all in 2020. This opportunity is also available for taxpayers whose financial situation was adversely affected because they were quarantined, furloughed, laid off, or were unable to work because of lack of childcare.
If you take a distribution and are able to contribute a like amount back into a retirement account within 3 years, you can treat those as if they had been direct rollovers within the normal 60-day period. Of course, distributions not deemed to have been rollovers would still be subject to the regular income tax.
Small Business Interruption Loans and Loan Forgiveness Opportunities
Any business or 501c (3)/not-for-profit that has less than 500 employees is eligible to receive a loan that can be used to cover payroll (up to $100,000 annual salary per employee), certain benefits (including sick leave and health insurance), mortgage or rent, utilities and existing debt service payments. In order to qualify, a business must have existed on February 15, 2020 and have employees. Borrowers will not be required to prove that they suffered actual harm in order to qualify. These loans are VERY different from the SBA loans referred to as Economic Injury Disaster Loans (EIDL) announced a few weeks ago. These loans will have up to a 10-year term with a maximum interest rate of 4%. They can be administered through most banks, will have no fees, no prepayment penalty, required collateral or personal guarantees. Payments can be deferred for 6 to 12 months.
One of the most important aspects of these loans is their eligibility for forgiveness! If the employer continues to employ their workers between March 1, 2020-June 30, 2020, a portion of the loan may be forgiven. The amount forgiven is subject to very specific calculations and is limited if the employer reduces their workforce or their payroll. These calculations will need to be supported with documentation including payroll tax returns and financial statements and are impacted by any credits applied against payroll taxes under the “Families First Coronavirus Response Act”.
Anything not forgiven or repaid by December 31, 2020 will be converted to a maximum 10-year loan with an interest rate no higher than 4%. The amount forgiven is not considered taxable income.
The Act requires that the SBA issue guidance and regulations on this by the end of April 2020.
Employee Retention Credit
Businesses that fully close or suspend operations as a result of COVID-19 related Executive Orders or other governmental authority requirements (such as travel or group meetings), may be eligible for a credit against a portion of their payroll taxes paid. This same credit is available for employers whose gross receipts decline by 50%.
Payroll Tax Payment Delay
For employers (including self-employed individuals) that DO NOT use the borrowing opportunities described above, they may postpone payment of their 2020 employer portion of their payroll taxes (6.2%). 50% will be due on December 31, 2021 and the balance is due on December 31, 2022. The delay is allowed only for payment and not for the filing deadlines.
Shortened Depreciation Life
The IRS has required “qualified improvement property” to be depreciated over 39 years. For these types of additions (generally remodeling of the interior of an existing building), the new life will be 15 years and this change is retroactive to January 1, 2018.
Corporations that have an AMT (Alternative Minimum Tax) credit can claim it now.
Other Aspects of the ACT Applicable to Both Individuals and Organizations
Deduction for Charitable Contributions
After the 2017 Tax Act, many individuals no longer itemized their deductions due to the higher standard deductions. This new Act allows for an “above the line” deduction for charitable contributions up to $300 in 2020. The AGI limitations for both individuals and corporation contributions have also been raised for 2020. An individual that itemizes could deduct charitable contributions equal to 100% of their AGI.
Net Operating Loss (NOL) Carrybacks
The 2017 Tax Act allowed NOLs to be carried forward, but not back. This Act temporarily offers the taxpayer the opportunity to carry back losses incurred in 2018, 2019 and 2020 and utilize any losses to fully reduce taxable income (not limited to 80%).
The CARES Act (House bill 748) is 335 pages long. Our team will continue to share more information about this new law and its details along with some tips for utilizing the opportunities it provides until we return to positive economic times in the United States. Our Firm’s mission is to “deliver peace of mind” and we would be honored to help you.