The Coronavirus Aid, Relief and Economic Security Act, signed into law on March 27 in the wake of the COVID-19 pandemic, is the largest economic stimulus package in American history. The $2 trillion coronavirus aid package, also known as the CARES Act, aims to provide economic relief to the United States economy and to help individuals and businesses weather an unprecedented reduction of economic activity and freeze on American society.
The act is massive in scope and provides for an estimated $560 billion for individuals, $500 billion for big corporations, $377 billion for small businesses, $339.8 billion for state and local governments, $153.5 billion for public health, $43.7 billion for education and a safety net of $36 billion. (1) While the act is far-reaching, this discussion focuses mostly on the act’s impact on individual taxpayers and small businesses. Please remember to discuss any potential tax consequences that may arise with your tax advisor and financial planner prior to making any decisions regarding the information below.
One provision of the CARES Act that has received a lot of attention is the $1,200 cash payments many Americans will be receiving in the coming weeks. Most individuals earning less than $75,000 per year are expected to receive a one-time payment of $1,200. There is a phaseout range for individuals who make between $75,000 and $99,000. Individuals who make more than $99,000 will not receive a payment. Married couples filing jointly and earning less than $150,000 combined will receive the full $1,200 for each spouse. The phaseout for married couples begins at $150,000 and goes to $198,000. Families are also eligible to receive $500 per child. These payments will be based on the taxpayer’s 2019 tax filings (2018 if the individual hasn’t yet filed for 2019). Individuals who receive Social Security benefits are also eligible for the payments.
The new act also allows for early withdrawals from retirement plans sans the 10% early withdrawal penalty for individuals who have not yet reached age 59½. Taxpayers impacted by the coronavirus can withdraw up to $100,000 from a qualified retirement plan by the end of 2020 and would not be subject to the penalty. They are also able to take a loan from certain plans of up to 100% of the account balance or up to $100,000, whichever is less. Required minimum distributions (RMD) from retirement plans, 401(k)s and IRAs have also been suspended for 2020. Keep in mind that taking early distributions or loans from your retirement accounts can have a negative impact on your retirement, so it would be prudent to discuss these decisions and any potential consequences with your financial planner prior to acting.
The law provides federal unemployment benefits to furloughed workers for up to four months. The federal government will pay $600 per week on top of the base amount workers are receiving from their state. Freelancers, gig workers, contractors and other self-employed individuals who lose work due to the coronavirus are eligible to receive aid through the end of the year.
The tax filing deadline for tax year 2019 has been extended. Taxpayers will now have until July 15, 2020 to file their 2019 federal tax returns. The act also provides temporary relief for those with federal student loan debt. Individuals can defer payments on their loans, and interest on the loans is deferred through September 30. Employers can provide employees with up to $5,250 in student loan repayment benefits tax-free.
Qualifying nonprofits and small businesses with fewer than 500 employees are eligible for small business interruption loans of up to $10 million. These loans can be used to cover operating costs such as payroll, rent, utilities, debts and employee-related costs. Certain costs will be eligible for loan forgiveness.
Employers can utilize quarterly credits if they have suffered full or partial suspension of business operations due to COVID-19. These credits can be used against some employer payroll taxes. Employers can defer the employer portion of Federal Insurance Contributions Act (FICA) payroll tax liability. Half will come due in 2021, and the other half will be due in 2022. Taxpayers participating in the small business loan program are not able to use the Employee Retention Credit.
The act also revised some provisions of the Tax Cuts and Jobs Act including adjustments to net operating losses, loss limitations for noncorporate taxpayers, adjusted taxable income limits and the refunding of unused minimum tax credits for the previous two years.
If you have any questions about how the CARES Act might impact you, your family or your business, please reach out to your financial planner and remember to speak with your tax advisor about any tax consequences that may arise as you navigate the coming months.
Authored by Dennis Culver, Insight Wealth Strategies