The $2 trillion COVID-19 stimulus package, Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, was signed into law on Friday, March 27. The CARES Act provides tax relief and tax incentives for individuals and businesses, supports and provides loan forgiveness for small businesses, and enhances unemployment insurance. We are focusing this blog primarily on aspects of the CARES Act related to tax relief for individuals and businesses.
Individual Tax Rebates
- A one-time payment will be made to individuals and families in the form of an advance refundable tax credit. This credit would not be counted as taxable income for recipients. Eligibility for the payment is based on the most recent of 2019 or 2018 income tax or Social Security data.
- Single taxpayers with adjusted gross incomes (AGIs) up to $75,000 will receive a $1,200 rebate, which is phased out up to income of $99,000. This payment will not count as income or resources for a 12-month period in determining eligibility for, or the amount of assistance by, any federally funded public benefit program, including Social Security. Taxpayers with no income or income tax liability are eligible to receive the credit.
- Married couples with AGIs of up to $150,000 will receive $2,400, subject to the same phase out as single taxpayers, up to incomes of $198,000.
- Dependents, non-resident aliens, estates and trusts are not eligible.
- An additional rebate of $500 will be paid to eligible parents for each child 17 or younger who qualifies for the child tax credit.
- The Treasury has set a goal of processing the first payments in the week of April 6, 2020. Payment updates will be posted at IRS.gov/coronavirus. Eligible individuals will receive their payment via direct deposit if the IRS already has their bank account information. If direct deposit information is not yet on file, the Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS.
- The 10 percent early withdrawal penalty fee is waived for qualified individuals affected by the coronavirus1, who may withdraw up to $100,000 from retirement accounts without facing penalty as long as the distributions are paid back within three years. If the amount is not repaid, the distribution can be included in taxable income over the following three years.
- The deadline for making a 2019 contribution to an IRA is extended to July 15, 2020 to match the federal tax filing deadline of July 15.
- The required minimum distribution (RMD) rules are waived for retirement accounts for one year. The delay applies to both 2019 RMDs that need to be taken by April 1, 2020 and 2020 RMDs. Individuals who have already taken distributions in 2020 may return the funds to an IRA or another qualified retirement account within 60 days to avoid owing taxes. RMDs from inherited IRAs have also been waived.
- Amounts available for loans from qualified plans have increased to $100,000 and percentage limitations have been removed. Repayments may also be eligible for delay.
Small Business Loans
Paycheck Protection Program (PPP)
- The PPP amends the Small Business Act (SBA) for expansion of guaranteed lending under Section 7(a) to provide loans to small businesses and other entities to cover their payroll (including health insurance costs), rent, mortgage payments and utilities.
- Portions of a PPP loan covering those costs may be forgiven for 8 weeks from February 15 to June 30, 2020.
- The amount of loan forgiveness is reduced if there is a reduction in the number of employees or a reduction of greater than 25 percent paid to employees. The forgiven amount is nontaxable.
- Eligible businesses include not only small businesses, but also 501(c)(3) nonprofits, 501(c)(19) veterans organizations, and Tribal business, each of which must have fewer than 500 employees, or the applicable SBA size standard for the industry, if higher.
- Sole proprietors, independent contractors, and self-employed individuals are also eligible provided documentation is produced to substantiate eligibility.
- Entities cannot receive more than one PPP loan.
- Loans can be up to 2.5 times the borrower’s average monthly payroll costs, not to exceed $10 million. Payroll costs will be capped at $100,000 annualized for each employee.
- Loans would have up to a 10-year term with an interest rate not to exceed four percent.
- Payments can be deferred on PPP loans for six months up to one year.
Economic Injury Disaster Loans (EIDLs)
- The Act provides the SBA with additional funding to cover the costs and administrative expenses associated with the provision of the EIDLs to provide an emergency advance of up to $10,000 to small businesses and private non-profits.
- Advances do not need to be repaid, and may be used to keep employees on payroll, to pay for sick leave, and to pay for business obligations such as debts, rent, and mortgage payments.
- Receiving an EIDL does not disqualify an entity from receiving a PPP loan, but any amount received as an advance would reduce the amount received under a PPP loan. However, EIDLs may not be used for the same purpose as a PPP loan.
- For all federally owned student loans, all loan and interest payments will be deferred through Sept. 30 without penalty to the borrower.
The Act allows charitable deductions of up to $300 to churches and charitable organizations in 2020 regardless of whether contributors itemize their deductions or not.
The Act modifies the limitations on deductions for charitable cash contributions in 2020 by individuals that itemize their deductions and corporations. For an individual, the normal limit on certain charitable deductions of 50% of AGI will not apply. For electing corporations, the normal limit on charitable deductions of 10% of taxable income is increased to 25% of taxable income.
- Economic impact payments: What you need to know from the IRS
- How the Treasury Department is Taking Action
Investment advisory services offered through GW & Wade, LLC.
The information above is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change. Information is as of the date of publication. GW & Wade cannot guarantee that this information is accurate, complete, or timely. We make no warranties with regard to such information or results obtained by its use. Always consult an attorney or tax professional regarding your specific situation.
Clients of the firm who have specific questions should contact the GW & Wade Counselor with whom they regularly work. All other inquiries, including any inquiry concerning a potential advisory relationship with GW & Wade, should be directed to:
Laurie Wexler Gerber, Director of Marketing
GW & Wade, LLC
1 The distribution provision applies to individuals who have been diagnosed with COVID-19 by a test approved by the CDC, their spouse or dependent who has been diagnosed by such a test, or an individual who experiences financial consequences as a result of being quarantined, furloughed, laid off, or suffered reduced working hours, or who is unable to work due to lack of child care, or closing or reducing hours of a business owned or operated by the individual, all due to the virus or disease.