The last few weeks have been surreal and frightening as we’ve watched a pandemic unfold rapidly across the globe. Life feels upside down. As we keep our children home from school, telecommute, and hug our grandchildren through computer screens, we hope our communal social distancing efforts are flattening the curve. But it still feels scary to watch the disease spread. The global economy and financial markets have shuddered in response.
People across all walks of life are wrestling with the financial impact of shutting down huge portions of our economy. If you are a small business owner, you may be wondering how to pay employees or even keep your business alive. Your favorite neighborhood café likely has staff who are struggling. Your children or grandchildren who recently graduated from college may be furloughed as their new employers wait for the economy to restart before bringing them on board. If you were planning to retire this year, you might be reconsidering.
In short, you or someone close to you likely has financial challenges on top of the fear of contracting this disease, and combined with varying degrees of social isolation we all feel. But at the same time, we are witnessing innovation as businesses of all sizes redesign their operations, and in some cases pivot to an entirely new business model. Many schools and businesses are utilizing virtual classrooms and remote collaboratives to continue delivering value during this “stay at home” period.
Fortunately, the government has stepped in to provide some economic relief. The Federal Reserve has acted quickly and forcefully over the last few weeks, providing much-needed liquidity to the financial system. Now Congress has taken a huge step, too.
On March 27th, the President signed the largest economic relief package in U.S. history – three times the size of the 2008 “TARP” package. The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, is far-reaching in its attempt to rescue individuals, small businesses, borrowers, and certain sectors of the economy including airlines and health care.
The CARES Act is by no means a panacea. Money does not grow on trees. At some point, the U.S. will need to address its burgeoning national debt, and the result will likely be higher taxes and possibly a more inflationary environment. But a key function of government is to provide assistance when unforeseen external forces wreak major havoc. We believe the CARES Act will provide meaningful financial relief to a wide variety of individuals, families, companies, and state/local governments. Here are three specific examples:
- If you take Required Minimum Distributions (RMDs) from your retirement accounts or inherited IRAs, you can suspend those RMDs for 2020 if you prefer not to withdraw funds in a down market (or simply would prefer not to pay taxes on those distributions this year).
- If you own a small business or run a nonprofit, you may be able to take a forgivable loan of up to 2.5 times your average monthly payroll costs. If you use the funds to pay your staff, your rent, your utilities, or the interest on your mortgage, the loan principal is forgiven.
- If you earn less than $75,000 as a Single taxpayer or $150,000 as Married Filing Jointly taxpayers, you can receive $1,200 per adult and $500 per qualifying child as a direct payment.
We have outlined these and other key provisions in greater detail below. In summary, the CARES Act presents significant opportunities for both individuals and businesses in these challenging times.
We are here to help you understand how this legislation may positively impact your financial plan. Please reach out to your financial advisor, or your tax and legal advisors, should you have any questions.
The CARES Act: What’s in the Coronavirus Stimulus Package?
Note: The following information is based on our initial understanding of the bill that was signed into law March 27, 2020. It is therefore subject to amendment.
The $2 trillion relief package known as the CARES Act has massive implications for individuals and businesses. While not exhaustive, our analysis highlights three main categories of relief included in the legislation:
- Help for Individuals
- Help for Small Businesses, including Nonprofits
- Tax and Retirement Planning
HELP FOR INDIVIDUALS
Immediate Payments to Taxpayers
- How Much: $1,200/taxpayer or $2,400/married couple filing jointly plus $500/qualifying child.
- Who is Eligible: All taxpayers whose 2019 adjusted gross income is less than $99,000 (Single) or $198,000 (Married Filing Jointly). Note that payments are phased out for taxpayers making over $75,000 (Single) or $150,000 (Married Filing Jointly).
- Other Considerations: These rebates are not likely to be taxed as income.
Student Loan Relief
- Payments Suspended: Federal student loan payments are suspended through September 30, 2020 and shall not accrue interest.
- Tax Relief: Students will not have to pay income tax on employer-made payments for education (which historically were taxed.
- Who is Eligible: Expanded to include self-employed workers, independent contractors, and freelancers (the “gig economy”).
- How Much: An additional $600/week for 4 months on top of state benefits. Benefits are extended to 39 weeks. (Many states, including California, normally limit benefits to 26 weeks.)
Reprieve from Negative Credit Reporting
- Who is Eligible: Borrowers who skip or defer a payment during the COVID-19 “covered period.”
- Note that this does not apply to payments or debts labeled delinquent prior to January 31, 2020.
- What Happens: Borrowers will be reported as “current” on their credit reports so their credit scores are not impacted negatively.
No Foreclosure or Foreclosure-Related Evictions
- Who is Eligible: Borrowers with federally-backed mortgages who claim they were “harmed by the coronavirus outbreak.” This includes “multi-family borrowers” as defined by the Act.
- What Happens: As of March 18, 2020, mortgage servicers cannot initiate foreclosure proceedings or implement foreclosure-related evictions during the “covered period.” Borrowers get up to 360 days of mortgage forbearance.
HELP FOR SMALL BUSINESSES, INCLUDING NONPROFITS
Forgivable Loan for Up to 2.5 Months of Payroll
- Who Can Apply: Small businesses and nonprofits with fewer than 500 employees
- Hospitality businesses (e.g., restaurants, bars, hotels, and RV parks) can treat each of their locations separately.
- If you have more than 500 employees, you may still qualify. Talk to your financial advisor.
- When You Can Apply: As soon as banks start processing the loans, which should be soon. Loans must be taken before June 30, 2020. Special provisions allow for “express loans” of up to $1MM, fast-tracking approval within 36 hours.
- How Much You Can Take: The loan amount is capped at the lesser of 2.5 times your average monthly payroll (based on the 1-year period before the loan date for most borrowers) or $10,000,000.
- How Loans are Forgiven: If you use the loan for “eligible expenses” during an 8-week period after your loan’s origination date, the amount up to the loan principal can be forgiven, tax-free. Eligible expenses include:
- Payroll costs, including salaries up to $100,000 (annualized) per employee, health insurance premiums, commissions, cash tips, and state and local payroll taxes – but not federal payroll taxes(1)
- Interest payments on mortgages for real or personal property (but not principal or pre-payments)(2)
- Loan Forgiveness Is Reduced If:
- You reduce your full-time equivalents (FTEs), including cutting hours, during the “covered period.”
- You reduce the compensation of employees who make less than $100,000/year by more than 25% during the “covered period.”
- However, you may avoid the reduction in forgiveness if:
- You made no further cuts by 30 days after the passage of the Act.
- You rehire and raise wages to prior levels by June 30, 2020.
- Repaying the Loan
- Your interest, principal, and fees will be deferred for 6 months to 1 year.
- The interest rate will be capped at 4%.
- The maximum loan maturity is 10 years from the date you apply for forgiveness.
- There are no prepayment penalties.
- Other Considerations:
- No collateral or personal guarantees are required.
- Sole proprietors, independent contractors, and self-employed individuals are all eligible under this program.
- If you already have an Economic Injury Disaster Loan (EIDL) through the Small Business Administration for COVID-19, you can refinance it into this program, but you cannot hold both loans for the same expenses.
2020 Payroll Tax Deferral
- Who is Eligible: Employers who do not take advantage of the forgivable loan mentioned above.
- Deferral Dates: Employers can defer payment of their 2020 payroll taxes and pay:
- 50% in 2021.
- 50% in 2022.
Payroll Tax Credit
- Who is Eligible: Employers who do not take advantage of the forgivable loan mentioned above and who either:
- Are at least partly shut down due to government orders; OR
- Experience a decline of at least 50% in gross receipts for a 2020 calendar year quarter compared to the same quarter in 2019.
- Note: Nonprofits must be experiencing a partial shutdown due to government orders to qualify.
- Amount of Credit: Up to 50% of “qualified wages” of each employee
- Qualified wages are capped at $10,000 per employee.
- Applies to wages paid between March 12, 2020 and December 31, 2020.
- Credit is applied against employment taxes.
Note that there are additional provisions in the bill for relief for businesses, including modifications for net operating losses. Please consult your financial advisor, tax advisor, or attorney for more details.
(1) Does not include qualified sick leave or family leave wages that receive a credit under the Families First Coronavirus Response Act
(2) Mortgages, rental contracts, and utilities contracts must have been established prior to February 15, 2020 to be eligible.
TAX AND RETIREMENT PLANNING
Extended 2019 Tax Filings/Payments
- Who is Eligible: Businesses and individuals.
- New Deadline: July 15, 2020 to file and pay federal taxes.
- Estimated Tax Payments: April 2020 quarterly payment is not due until July 15, 2020 (June 15 and September 15 estimated payments are still due on these dates).
- State Tax Deadlines: Please check your state’s tax board for their filing deadline. Most states are now aligned with the federal July 15th deadline.
- Note: If you expect a refund, please file promptly!
Retirement Plans: 2020 Required Minimum Distributions (RMDs) Waived
- Who is Eligible: Anyone with Required Minimum Distributions (RMDs) from retirement accounts for 2020. Eligible retirement accounts include:
- Traditional IRAs.
- Inherited IRAs (Traditional and Roth).
- 401(k)s, 403(b)s, and some other Defined Contribution Plans.
- Planning Opportunity: This presents a greater opportunity for Roth IRA conversions in 2020 considering recent market volatility.
Retirement Plans: 401(k) Early Distributions or Loans
- Hardship Distributions Doubled: Hardship distributions from 401(k)s, IRAs, and certain other retirement plans have doubled to $100,000 (without the 10% penalty that normally applies to early withdrawals before age 59-½).
- These withdrawals are still taxable, but the income tax can be paid over 3 years.
- 401(k) Plan Loans: Loans from 401(k)s (and certain other qualified plans) can be taken up to the lesser of $100,000 or the account balance. Any new or existing 2020 loan repayment due can be delayed for a year.
- New Charitable Deduction: For those who do not itemize deductions, there will be an allowable “above the line” deduction for charitable donations of cash (not to exceed $300). (Note: Contributions to donor advised funds and Section 509(a)(3) supporting organizations are not eligible.)
- New Charitable Contribution Limits for Cash Donations: The 2020 charitable contribution limitation for individuals will now be 100% of your adjusted-gross-income, or “AGI,” if you donate cash directly to a charity. (Note: Donor advised funds and Section 509(a)(3) supporting organizations are not eligible.) Cash donations used to be limited to 60% of AGI.
- The limitation is normally 30% of your AGI for stock gifts
- Anything above this income limitation (100% of AGI for cash and 30% of AGI for stock gifts) carries over for five years.
- Qualified Charitable Distributions (QCDs) from an IRA continue to be allowable starting at age 70-1/2, up to the allowable limit of $100,000 per year. Please note QCDs can continue to be executed even with the waiver of 2020 Required Minimum Distributions (RMDs).
- Planning Opportunity: Individuals may be able to offset a significant taxable income event in 2020 with a substantial charitable contribution.
This material is presented for informational purposes only and should not be construed as individual legal, tax, or financial advice. Individuals and businesses should always consult with their own legal, tax, and financial advisors.