On March 25, the Senate unanimously passed a significant stimulus bill to help individuals, families, and businesses weather the economic disruptions caused by COVID-19. The passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is the culmination of several days of negotiations between Republican and Democratic leaders in Congress and the White House. The bill was signed into law on Friday, March 27.

The CARES Act is an enormous piece of legislation. The size of the stimulus package is an estimated $2.2 trillion, equivalent to about 10% of U.S. GDP in 2019. By comparison, the 2008 Troubled Asset Relief Program (“TARP”) was $700 billion, and the subsequent American Recovery and Reinvestment Act (“ARRA”) of 2009 was $831 billion. 

The focus of the CARES Act is fairly distinct compared to the combination of TARP and ARRA in 2008-2009; the CARES Act directs almost all of its support to individuals, businesses, and industries outside of the financial sector, while TARP and ARRA collectively directed almost half of their stimulus efforts to banks and financial institutions to shore up the financial system. The CARES Act provides almost $900 billion for emergency loans and financial assistance to large and small businesses, as well as direct payments to individuals up to $1,200 ($2,400 for a married couple), more generous unemployment assistance, several income tax provisions that affect businesses and individuals, and direct financial support to hospitals and state and local governments. In comparison, TARP was a focused $700 billion program to purchase distressed assets from institutional investors, and ARRA split its emphasis between tax benefits and support for low-income workers and the unemployed (around $370 billion), and a series of longer-term investments in the healthcare, infrastructure, transportation, education and other sectors of the economy.

There are a number of temporary income tax provisions in the CARES Act that will be of interest to our private clients. The discussion below highlights some of them.

PROVISIONS AFFECTING INDIVIDUALS AND FAMILIES
  1. Recovery Rebate for Individual Taxpayers – Tax Credit. U.S. Taxpayers will receive a one-time direct deposit of up to $1,200, and married couples will get up to $2,400, plus an additional $500 per child. The payments will be available for incomes up to $75,000 for individuals and $150,000 for married couples. U.S. taxpayers’ payments will decrease by $5 for every $100 their AGI exceeds the aforementioned thresholds. For example, taxpayers with no children whose AGI is above the following amounts will not receive a payment: single taxpayer over $99,000; head of household over $146,500; and married couples over $198,000. This payment will also be made to those who have no income, or whose income stems entirely from non-taxable benefit programs such as Social Security. Eligibility for the one-time payment will be calculated using taxpayer’s income/filing status as reported on their 2019 income tax return. If the 2019 return has not been filed, eligibility for the payment will be based on taxpayer’s 2018 income tax return information. Taxpayers are required to report the amount they receive on their 2020 income tax returns and an additional adjustment will be made (i.e., an additional refundable tax credit will be provided) if the one-time payment is less than the amount the taxpayer should have received. If a taxpayer who receives a payment has 2020 income/filing status above the Act’s thresholds, the taxpayer, as of now, will not be required to repay the Treasury. 
  2. Suspension of Required Minimum Distribution Rules for IRA and 401(k) accounts in 2020. The Act permits a one-year waiver of required minimum distributions (RMDs) for defined contribution plans described in Code sections 401(a), 401(k), 403(a) and (b), IRAs, and section 457 plans. This is a waiver, not a deferral, and if the taxpayer waives their 2020 RMD, they are not required to take the waived RMD in 2021, but would be required to take the normal 2021 RMD as determined based on the contribution plan’s value as of 12/31/2020. The waiver applies to 2019 RMDs that needed to be taken by April 1, 2020, as well as 2020 RMDs.
  3. Relaxation of Penalties on Early Retirement Account Withdrawals for Virus Related Hardship. The Act allows for a withdrawal of up to $100,000 in 2020 from retirement accounts without paying the normal 10% tax penalty if the account holder, their spouse or dependent(s) are diagnosed with COVID-19, or experience adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced due to the viruses. Withdrawn funds are considered income, but the taxpayer can spread the income over a 3-year period beginning with 2020. Additionally, the taxpayer can avoid any income recognition by repaying the withdrawal to the retirement plan within three years of receiving it.
  4. Enhanced Charitable Deductions in 2020. The Act allows taxpayers to take an above-the-line tax deduction for charitable contributions of up to $300 for the tax year 2020. In some situations, the percentage and excess carryover restrictions on charitable and other “qualified contributions” are disregarded.
  5. Expanded Unemployment Insurance Provisions and Benefits. The Act expands eligibility for unemployment benefits, including those furloughed or otherwise out of work as a direct result of COVID-19, self-employed or gig workers, and those who have exhausted existing state and federal unemployment benefit provisions. The Act increases the per week amount generally available by $600. This increase applies for unemployment payments made from the date of the Act’s enactment through July 31, 2020.
  6. Student Loan Repayment Deferral for Department of Education & Exclusion from Income Tax. Federal student loan borrowers are not required to make any payments through September 30, 2020. During this period, no interest accumulates on those federal loans. Lastly, the Act creates a new incentive that allows employers to provide up to $5,250 annually toward employee student loan payments on a tax-free basis for one year.
PROVISIONS AFFECTING BUSINESSES AND BUSINESS OWNERS
  1. $367 Billion Program for Emergency Loans and Guarantees for Small Businesses. The law provides for a $367 billion program for small and medium sized businesses. Businesses with fewer than 500 workers, including sole proprietorships and nonprofits, may apply for loans up to $10 million to cover for costs of employee compensation, rent, mortgage payments, and utility expenses. Additionally, the law provides sole proprietors, in addition to businesses with fewer than 500 employees, access to economic injury and disaster loans under the Small Business Act. These loans may be forgiven if the business retains its employees. The Small Business Administration (the “SBA”) will implement this loan program. Much of the specific details of applying for the loan and additional eligibility requirements will have to come from the SBA.
  2. Expanded Net Operating Loss Carrybacks. Businesses can carry back losses incurred in 2018, 2019, and 2020 to the five prior tax periods. These losses can fully offset the taxable income in the year to which the losses are carried back because the law temporarily suspends the rule limiting loss deductions to 80% of income. These favorable loss carryback rules can reduce a business’ tax liability in 2020 by generating additional refunds and credits for overpayments of taxes.
  3. Suspension of Excess Business Loss Limitations. The Tax Cuts and Jobs Act limited business owners from deducting business losses of more than $250,000 ($500,000 for married taxpayers filing jointly) as adjusted for inflation. The CARES Act suspends this limitation through the end of 2020, enabling some taxpayers to further reduce their tax liabilities for 2020 and prior taxable years in which this limitation applied.
  4. More Favorable Business Interest Expense Limitation in 2020. Interest expense incurred by businesses is normally not deductible to the extent such expenses exceed 30% of taxable income with certain modifications. The CARES Act increases the cap to 50% for the 2019 and 2020 taxable years, allowing businesses with high interest expense relative to income to take a higher interest deduction and reduce their tax liability. Notably, under the law, a business may calculate its 2020 business interest expense using its 2019 taxable income, potentially creating a larger deduction or loss that can be carried back.
  5. Delayed Payroll Tax Payments. Employers may delay the payment of 6.2% payroll taxes until January 1, 2021. Deferred payroll tax payments will be due in two equal installments payable on December 31st of 2021 and 2022.
  6. Payroll Tax Credits to Businesses Affected by the COVID-19 Outbreak. The law provides for a 50% payroll tax credit on wages paid up to $10,000 per employee. The credit is available to employers that faced significant disruptions to their operations and revenue streams as a result of the COVID-19 outbreak.
  7. Certain Real Estate Improvements Now Eligible for 100% Depreciation. The law classifies qualified improvement property as 15-year property that is now eligible for 100% bonus depreciation. This provision will allow for significant offsets to taxable income for the 2019 and 2020 taxable years as well as for tax refunds for 2018.

The financial support and tax relief provides by the CARES Act will be a welcome development for many of our clients. Considering the volume of changes, determining the extent to which the law affects a particular person or business will take some effort. Additionally, because many of the CARES Act's relief programs will be shaped by administrative agencies, such as the SBA, which are tasked with implementing the legislation with rules, regulations, and procedures, it may take some time before all the specifics of the relief package become clear. We will continue to monitor this legislation and the programs contained in it and help clients to take full advantage of this Act. 

 

 

 

 

 


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