I wanted to provide a top-level summary of the highlights of the CARE Act (Stimulus Package) that I believe will be most pertinent to you, our clients. Please note this is prepared based on my understanding of the CARES Act as of March 30, 2019. As more information is clarified by Federal Regulation, this data may change in whole or in part. This is information only. It is by no means a comprehensive guide and should not be construed to be advice.
The Stimulus Check
What the FEDs are calling “Recovery Rebates” are coming, up to $1,200 for individuals with adjusted gross income (“AGI”) up to $75,000 ($2,400 for joint filers with AGI up to $150,000) plus an additional $500 for each child under the age of 17 (subject to certain exceptions) for US taxpayers through an advance refundable tax credit against 2020 income taxes. By doing it this way, the check is not taxable income.
There is a phase out of the rebate, which causes a $50 reduction in the rebate for every $1,000 of AGI above these thresholds. For example, individuals with no children having an AGI of more than $99,000 and married couples with no children filing jointly having an AGI of more than $198,000 would be phased out completely and receive no recovery rebate. The advanced payment of the recovery rebates will be based on the AGI reported on tax returns filed for 2019, and if no such tax return has been filed for 2019, the AGI reported on the 2018 filed tax returns will be used. Delaying the filing of the 2019 tax return may be beneficial for some.
Can I Access 401K/IRA?
I am already getting calls on whether you can take a penalty free retirement distribution. In some cases, yes!
Individuals may take coronavirus-related distributions up to $100,000 without the 10% penalty. Any distribution is subject to federal income tax but can spread that tax over the three years starting with 2020. The distribution may also be repaid during the three-year period beginning on the day after the date of the distribution. Repayments within the three-year period will result in the distribution not being subject to federal income taxation.
An individual must satisfy certain requirements in order to qualify for coronavirus-related distributions. In summary:
“Those who are diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention or who have a spouse or dependent who tests positive for the coronavirus can take emergency retirement account withdrawals. Those who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced work hours or being unable to work because of a lack of childcare due to the coronavirus pandemic are also eligible for the emergency withdrawals.”
Please note that the definition of “adverse financial consequences” is still very gray area! You may want to hold off a bit on taking a distribution. I will however take this opportunity to remind you that you can take a distribution and
then do an indirect rollover within 60 days of the distribution, as long as you have not done t his in the previous 365 days.
There is also a temporary change to 401K loan provisions. If you qualify for coronavirus-related distributions, you may instead take loans of up to the lesser of (1) $100,000 (increased from $50,000) or (2) 100% (increased from 50%) of the participant’s vested account balance.
The Payroll Protection Program: A New Program
Unlike the disaster loans currently available through the SBA, loans under this program are potentially forgivable up to 100% of the principal. Under PPP, there is a presumption of negative impact from COVID-19, you do not have to prove negative impact.
Who is eligible? Businesses, nonprofits, and some other organizations with less than 500 employees. PPP is even available to sole proprietors, independent contractors, and self-employed individuals
How much is the loan? 2.5X the average monthly payroll costs (up to $10 mil) incurred in the one-year period before the date of the loan. Payroll costs include salary/wages/tips, sick/family leave/PTO, severance payments, group health benefits (including insurance premiums). For any employee who is paid more than $100,000 salary, only the amount up to $100,000 (prorated for the covered period) is calculated into the number.
Loan proceeds may be used for: payroll costs; continuation of group health care benefits during periods of paid sick, medical, or family leave, or insurance premiums; salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities; and interest on other outstanding debt. Any portion of the loan that is not forgiven will be for a term not to exceed 10 years and at an interest rate of no more than 4%.
The amount of the loan that is forgivable is the sum of the payroll costs, mortgage interest payment, rent, and utilities incurred or paid by the borrower during the 8-week period beginning on the loan origination date. Any portion of the loan that is forgiven is excluded from taxable income. If the recipient of the loan laid off employees or reduced wages/salaries, then other provisions will apply.
Deferred Payroll Taxes
Subject to several requirements, the law allows employers to defer the payment of the employer’s share of the 6.2% Social Security tax on wages paid beginning on March 27, 2020 and ending on December 31, 2020. A corresponding deferral is also permitted for the equivalent portion of self-employment taxes. The deferred amounts are payable in two installments, with 50% of such taxes being due on December 31, 2021, and the remainder due on December 31, 2022. This deferral of Social Security taxes is not, however, allowed where the employer has had a covered loan forgiven, as discussed above under Forgivable SBA Loan Program.
Net Operating Losses
The CARES Act allows businesses to carry back NOLs incurred in 2018, 2019, and 2020 for five years. Those client’s that had a 2018 loss can potentially carry that loss back five years and receive a REFUND!
Again, this for information only. If you have a specific question, please email and we will get to it as soon as we can.