On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, an estimated $2 trillion federal stimulus package to combat the harmful economic effects of the COVID-19 pandemic. The law looks to provide cash infusions to individuals, businesses, health care organizations and state/local governments through payments, loans and tax credits.
Here are some of the provisions that we believe will be of interest to you:
Provisions for individuals
- Suspension of required minimum distributions (RMDs) in 2020 for both retirement account owners and beneficiaries. This suspension is applicable to traditional IRAs and SEP IRAs, as well as 401(k), 403(b) and governmental 457(b) plans.
- If you have already taken your 2020 RMD, you may be able to undo it:
- If you took your 2020 RMD within the last 60 days, you may return it to your retirement account as a 60-day rollover by depositing the distributed assets back into your retirement account.
- If you took your 2020 RMD more than 60 days ago, you may still be able to return it to your retirement account. The IRS provided relief from the 60-day rollover rule when it issued guidance in 2009, the first time there was an RMD suspension due to market conditions. Note however, that the prior relief did not extend to the one-rollover per year rule. So such a rollover may count as your one rollover (but you can still do IRA to IRA transfers). The IRS is likely considering whether to provide similar relief with respect to RMDs waived under the CARES Act.
- If you are the beneficiary of an inherited IRA that already distributed 2020 RMDs, you generally may not undo them. However, a spouse may be able to roll over the RMD into a spousal IRA.
- If you are a first-time RMD-taker — that is, you turned 70 ½ in 2019 and you have until April 1, 2020, to take your first RMD — you may skip taking both your “delayed” 2019 RMD and your 2020 RMD. Non-first-timers may not skip their 2019 RMD.
- If you are the beneficiary of an inherited/stretch-out IRA that is subject to RMDs and you have not yet taken your 2020 RMD, you may skip the 2020 RMD.
- Retirement accounts that are currently subject to the 5-year rule following the account owner’s death (generally, retirement accounts payable to an estate or other entity that did not qualify for stretch treatment) may skip counting 2020 as a year.
- The CARES Act waives the 10% early-withdrawal penalty for distributions from retirement accounts up to $100,000 if you can show you need the money for a coronavirus related distribution (CRD). A CRD is defined as needed because:
- You, your spouse or a dependent have been diagnosed with COVID-19;
- You are experiencing adverse financial consequences as a result of being quarantined, furloughed, laid off or having your work hours reduced because of the pandemic;
- You are unable to work because you lack childcare due to COVID-19;
- You own a business that is closed or operating under reduced hours due to the pandemic; or
- You have another reason that the Internal Revenue Service (IRS) in its discretion decides is acceptable.
You will still have to pay income tax on such a distribution, but those tax payments can be spread over the next three years. However, the CARES Act does allow amounts to be repaid to retirement accounts within three years of the distribution. If repaid, any amount previously included in income could be exempted by correcting a prior year’s return. Unless such a special distribution is urgently needed, we generally recommend that clients continue to take advantage of tax-deferred growth and not take early distributions from their retirement accounts.
- The CARES Act allows an individual to make a cash contribution of up to $300 to 501(c)(3) public charities and take an above-the-line deduction in computing their adjusted gross income (AGI). (Itemized deductions are below-the-line.) This deduction will be available beyond 2020 but may be used only by those who do not itemize.
- The charitable deduction limit to 60% of AGI is lifted, and donors may deduct the full 100% of their charitable contributions of cash to 501(c)(3) public charities.
- These new rules do not apply to gifts to donor-advised funds, private foundations or 509(a)(3) support organizations and are not available for any gifted assets other than cash.
- The taxable income limitation for charitable contributions by corporations is increased for 2020 from 10% to 25%.
Stimulus payments to individuals
- Individuals with AGI of up to $75,000 in 2019 will receive a one-time check from the federal government of $1,200.
- Married couples filing jointly with AGI of up to $150,000 in 2019 and heads of households with AGI of up to $112,500 will receive $2,400.
- Taxpayers with children claimed as dependents will receive an additional $500 per qualifying child. There is a phase-out, and those who are single with no children or married couples with no children with AGI exceeding $99,000 or $198,000, respectively, will not receive a check. Those with children will have more AGI cushion before they are completely phased out of receiving a check.
- If a 2019 tax return has not yet been filed, the 2018 return will be used to determine AGI.
- Stimulus checks are estimated to be paid in May 2020 to the direct deposit account on file for Social Security or refund deposits; otherwise, they will be mailed to the last known address.
Provisions for small business owners
Paycheck Protection Loans
Businesses with fewer than 500 employees — including sole proprietors, independent contractors, “gig economy” workers and anyone otherwise self-employed, as well as public charities with fewer than 500 workers — can apply for loans of up to $10 million during a covered period from February 15, 2020, to June 30, 2020, to help provide for payroll costs and other expenses, such as mortgage payments, rent, utilities and other debt service. The loans are fully guaranteed by the federal government through the end of 2020 and can have a maturity of up to 10 years.
Business owners will be able to apply for the Paycheck Protection Program loans at any lending institution (a bank, community bank or credit union) that is approved to participate in the program through the existing U.S. Small Business Administration (SBA) 7(a) lending program and additional lenders will be approved by the Department of Treasury.
Forgiveness of the first eight weeks of Paycheck Protection Loans
The portion of the Paycheck Protection Loan that was used for the first eight weeks of payroll costs, interest on mortgage obligations, rent and utilities is eligible for permanent forgiveness.
Deferral relief and interest rate cap for Paycheck Protection Loans
Payments of principal and interest can be deferred for a period of no less than six months and no more than one year. Furthermore, the interest rate is capped at 4%.
Expansion of the SBA Disaster Loan Program
Separate from Paycheck Protection Loans, this program expands access to disaster loans to sole proprietors and allows a working capital loan to help overcome the temporary loss of revenue. In addition, entities that apply for a disaster loan can get an immediate advance of up to $10,000 to maintain payroll, and the advanced $10,000 does not have to be repaid even if the full loan application is later denied.
Among the other benefits for businesses
- The employer’s portion of Social Security payroll tax payable in 2020 may be deferred until January 1, 2021, with half of the deferred 2020 payment due at the end of 2021 and the other half due at the end of 2022.
- Employers may be eligible for up to one year of credit against the employer’s 6.2% share of Social Security tax for a business that is fully or partially suspended due to government orders, or where revenue in a quarter in 2020 is less than 50% of the revenue in the same quarter last year.
- Employers may be eligible for more flexible net operating loss rules for access to an immediate refund.
The above is provided as a general overview of certain provisions of the CARES Act. The CARES Act is quite comprehensive, and there are a number of other provisions that can benefit individuals, distressed industries, states and municipalities and health care entities. Please consult your legal and/or tax advisors to understand how the CARES Act may apply in your specific situation.
Originally posted on April 1, 2020.