CARES Act Part 2 – Individual Provisions

On Friday, the President signed into law the CARES Act. This legislation contained very significant tax law changes, the majority of which are temporary and will only be relevant for the 2020 calendar year. We’ve spent the last five days digging through this 880 page legislation to highlight the most relevant changes for you. 

Below is a summary of these provisions, as they relate to individuals:

Tax Deadline Extension

 2019 Tax Returns

As you’re probably aware, the April 15th, 2020 tax deadline has been automatically postponed to July 15th, 2020. This includes all of the following:

  • 2019 Form 1040, Individual tax returns and payments
  • 2019 Traditional or Roth IRA contributions
  • 2019 HSA contributions

2020 Estimated Payments For those of you who make estimated payments throughout the year, the Q1 2020 estimated payments deadline was also extended to July 15, 2020. However, the Q2 2020 estimated payments deadline currently remains at June 15, 2020.

Stimulus Rebate Checks

Under the CARES Act, eligible individuals are allowed an economic impact payment equal to:

  1. $1,200 ($2,400 for joint return) plus
  2. $500 for each qualifying child of the taxpayer under 17 years old

 The amount of the credit is reduced (but not below zero) by 5% of the taxpayer’s adjusted gross income (AGI) in excess of:

  1. $150,000 for a joint return,
  2. $112,500 for a head of household, and
  3. $75,000 for all other taxpayers

We’ve put together this calculator to help you estimate your stimulus rebate. Please download this sheet to edit. This calculation is based on the CARES Act as of March 27th and may change.

For taxpayers who have already filed their 2019 tax returns, the IRS will use this information to calculate the payment amount. For those who have not yet filed their return for 2019, the IRS will use information from their 2018 tax filing to calculate the payment. This economic impact payment will be deposited directly into the same banking account reflected on the return filed.

In the coming weeks, Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail. The IRS will also mail a notice to the taxpayer’s last known address indicating how the payment was made, the amount of the payment, and a phone number for reporting any failure to receive the payment to IRS.

If you would like more information, please see this IRS news release.

If you are due a higher rebate based on your 2020 return next Spring, then you may be able to claim the excess over the amount of rebate already received as a credit on that filing. However, if the rebate received based on 2018 or 2018 was greater than what you would have been entitled to based on your 2020 filing, you will not be required to pay back the excess.

Charitable Contribution Provision

The CARES Act adds a deduction to the calculation of gross income for up to $300 of qualified charitable contributions made during the 2020 tax year by eligible individuals. Qualified charitable contributions must be made in cash to eligible 501(c)(3) non-profits and eligible individuals are those who do not elect to itemize deductions. Prior to the Cares Act, only taxpayers who itemized deductions (rather than taking the standard deduction) were allowed a deduction for charitable contributions.

Student Loan Debt

Employer-Tax Free Reimbursements

Eligible student loan repayments up to $5,250 are excluded from the employee’s gross income. Eligible student repayments are payments made by an employer directly to the employee or lender for principal or interest on any qualified higher education loan before January 1, 2021. This payment must be for the employee – it can’t be for a spouse or a dependent. Note that certain restrictions apply to S-corporation owners and self-employed individuals.

Suspension of Payments

The CARES Act offers a few benefits in relation to federal student loan payments. Note that these provisions only apply to loans that are held through the Department of Education.

  1. Student loan payments are suspended through September 30, 2020.
  2. Interest will not accrue during this time.
  3. Involuntary collection has been suspended. In other words, there is no garnishment of wages, Social Security, and tax refunds for student loan debt collection.
  4. If you are a part of a loan forgiveness program, this period of time will still count as “payments.” For example, those that are in the public service loan forgiveness program are required to make 120 consecutive payments. Although you may not make payments, this period of time will still count as payments toward the 120 consecutive payment requirement.

Student Loan Forgiveness

The CARES Act doesn’t include any provisions for student loan forgiveness. Initial proposals from Senate and House Democrats included student loan forgiveness plans for $10K and $30K but neither proposals were included in the legislation.  

Waiver on Early Withdrawal

The CARES Act provides that the 10% early withdrawal penalty does not apply to any coronavirus-related distribution that is made in 2020, up to $100,000. Note that the requirements for a qualified individual are one:

  1. Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC),
  2. Whose spouse or dependent is diagnosed with such virus or disease by such a test, or
  3. Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, etc.

This does NOT mean you do not pay tax on the distribution. However to ease the tax burden, the Cares Act includes a provision so that the amount distributed can be included in income ratably over 3 years (unless the taxpayer elects not to). The way the CARES Act is written you can contribute the aggregate amount of the coronavirus-related distribution back to the eligible retirement plan within the 3-year timeframe and treat the contribution amount as a trustee to trustee transfer.

Final Thoughts

I know this is a challenging time and we are working around the clock to stay on top of every detail as legislation changes. We are here to work through this with you and are honored to be a resource for our community during this time. 

Sincerely,

Paul, Mohib, and Jerome 

CARES Act Part 1 – Business Provisions

On Friday, March 27th, 2020 the President signed into law the CARES Act. This legislation contained very significant tax law changes, the majority of which are temporary and will only be relevant for the 2020 calendar year. We’ve spent the last five days digging through this 880 page legislation to highlight the most relevant changes for you. 

Below is a summary of these provisions, as they relate to businesses:

Paycheck Protection Program (PPP)

PPP loans are available to small business owners (with under 500 employees) or self-employed individuals (sole proprietorships or independent contractors), intended to be only used for the following operating costs:

  1. Payroll costs (including payments to contractors)
  2. Interest on mortgage obligations
  3. Rent
  4. Utilities
  5. Interest on other debt obligations incurred before the PPP

Eligible entities can borrow up to the lesser of $10 million or 2.5 times the average monthly payroll for the 1-year period before loan application, of which a portion can be forgiven subject to the provisions of the CARES Act. The amount of forgiveness is based on the total of costs 1 to 4 above over the 8-week period after loan grant, subject to reduction based on number of employees laid off and employee pay cuts implemented.  No collaterals or personal guarantees are required for application. PPP loans are expected to be made available through all SBA-approved lenders soon and you’ll have until June 30, 2020 to apply.

These loans are best suited for businesses that intend to bring back employees that have been laid off or furloughed, or employers who need additional capital to retain their existing workforce. 

SBA Loan Debt Relief

The SBA will pay all principal, interest and fees on existing 7(a) SBA loans for six months (disaster loans, PPP loans, 504 loans, and microloans are not eligible).


Economic Injury Disaster Loan (EIDL) and Grants

Small businesses and self-employed individuals can also apply for EIDLs, especially now with the CARES Act providing waivers for some stricter requirements (no available credit elsewhere and must have been in business for at least 1 year).  You can borrow up to $2 million and would just have to provide proof of economic injury for the application. Unlike the PPP loan, EIDL provides more leeway in terms of the type of expenses it can be used for. As a working capital loan, you can use the proceeds to pay for all operational costs, as well as any outstanding debts obligations you were unable to meet due to the disaster.

The CARES Act also allows for a $10,000 emergency grant advance that you can receive within 3 days of an EIDL application. And the kicker? You don’t have to pay any of it back, regardless of whether your EIDL was approved or not.

EIDLs are available until December 31, 2020, directly through the SBA website.

Employee Retention Tax Credit (ERTC)

This provision would allow employers to claim a refundable payroll tax credit equal to 50 percent of a maximum of $10,000 per employee of qualified wages paid (i.e. a maximum credit of $5,000 per employee) from March 13, 2020 to December 31, 2020. The credit is restricted to employers who see a full or partial suspension of operations due to a shutdown order or who see gross receipts decline by more than 50 percent relative to the same quarter the previous year. For employers with more than 100 full-time employees, the credit is restricted to wages paid to employees not providing service due to COVID-19. For employers with fewer than 100 full-time employees, it is applicable to all wages. 

This credit is not available to businesses who receive small business interruption loans and is subject to recapture. 

Payroll Tax Payment Deferral
The CARES Act provides for the deferral of paying certain employer payroll taxes through the end of 2020. Applicable payroll taxes include (1) 50% of the self-employment taxes, and (2) 100% of the employer portion of FICA taxes. Payments for the deferred payroll taxes are expected to be due in two equal installments, with one-half paid by December 31, 2021, and the other by December 31, 2022.
It is important to note that the above provisions are not available for any businesses that take advantage of the loan forgiveness program of the PPP.

Qualified Improvement Property

This provision would correct an error in the 2017 Tax Cuts and Jobs Act preventing businesses, particularly in the hospitality industry, from writing off facility improvement costs immediately rather than over 39 years. This change is intended to allow businesses to amend prior year returns to provide liquidity during the outbreak and to correct the technical issue.

Net Operating Losses (NOLs)

The CARES Act allows for a net operating loss carry-back for losses arising in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021 to offset income in the preceding five (5) years. 


Should I take the PPP, EIDL, or the payroll tax credits?

Finding out the best program to take advantage of ultimately requires a separate evaluation for each individual business, considering industrial, operational, and financial requirements. We at Launch Consulting are always here to help – whether with assessing which loans or credit to take, or even with applying for the loans. Please feel free to reach out if you need assistance.

Looking for more information? Here’s a link to the Senate Committee on Small Business & Entrepreneurship’s Guide for Small Business Owners.