The Broad View
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:
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.
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.
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.
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%.
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.
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.