The Senate late Wednesday night unanimously approved a $2 trillion emergency relief bill, Coronavirus Aid, Relief and Economic Security (CARES) Act, in response to the COVID-19 pandemic.
The Senate vote sends the bill to the House, where Majority Leader Steny H. Hoyer (D-Md.) announced a vote to approve it Friday morning. President Trump said he intends to sign it immediately.
Although the House has not approved the bill, most believe that changes to the bill would be unlikely.
HERE ARE SOME OF THE HIGHLIGHTS:
2020 Recovery Rebate for Individuals (Individual Stimulus Payments)
Checks will be $1,200 per adult – or $2,400 for married couples filing jointly – and an additional $500 per child under the age of 17.
The payments will be made between now and December 31, 2020. Checks are supposed to be produced “as rapidly as possible” but it has been suggested that it would take up to two months. If you have provided the IRS with direct deposit information to the IRS with your 2018 or 2019 tax return it will be paid electronically and will be paid faster.
The IRS will base the amount of stimulus payment off of your most recently filed tax return. If your 2019 return has not yet been filed, they will look to your 2018 return. And if a return has not been filed for either year, the IRS will determine your payment amount off of your Form SSA-1099, Social Security Benefit Statement.
The stimulus payments are not taxable income.
In order to receive a check, you’ll need to have provided a valid social security number for yourself, your spouse, and any qualifying children on your tax returns (or in the alternative an adoption taxpayer identification number). Those claimed as a dependent on another’s tax return will not be receiving a payment.
The payment has a phaseout provision. Once your adjusted gross income (AGI) exceeds $75,000 (single), $150,000 (married filing jointly), or $112,500 (heads of household) you’ll lose $5 of your payment for every $100 your AGI exceeds those thresholds.
- If you are single without any kids your stimulus payment would be $0 once your AGI exceeds $99,000.
- If you are married filing jointly without any kids your stimulus payment would be $0 once your AGI exceeds $198,000.
- Those taxpayers with children will be able to have more income before the payment is phased out. For a married couple filing jointly with 2 kids who is eligible for the maximum payment of $3,400 once their AGI exceeds $218,000 their payment would be $0.
Since the stimulus payments are technically advances of refundable credits, they act like a refund you are getting in advance. Therefore, when your 2020 tax return is prepared in 2021, the amount you are owed will be recomputed based on 2020 information. If the stimulus payment was less than what you are owed for 2020 (if for example you were phased out in 2019 but not in 2020, or if you had another child) the excess will be treated as a credit that will reduce your 2020 tax liability.
The CARES Act does not explicitly state that taxpayers will have to recognize income if there was an excess payment received. Nor is there anything in place that would require taxpayers to have to repay any excess advance payment.
Small Business Loans (Paycheck Protection Loans)
The CARES Act would expand the eligibility for small businesses (those with fewer than 500 employees) – including sole proprietors and nonprofits – to receive a loan under the Small Business Act.
The loans are meant to cover payroll and other expenses (paid sick, medical, or family leave, costs related to continuation of group health benefits, mortgage payments and rent, utilities, and other debts) from February 15, 2020 to June 30, 2020 (the “covered period”).
The loan period for this program would begin on February 15, 2020 and end on December 31, 2020.
Small businesses may take out loans up to $10 million (limited to a formula tied to payroll costs) and can cover employees making up to $100,000 per year.
Payroll costs that would be covered do not include any qualified sick leave or medical leave for which a credit is allowed under the new Families First Coronavirus Relief Act passed this past week.
The loans will have a maximum maturity of ten years and an interest rate not to exceed 4%. There would not be any standard fees imposed and no personal guarantees are required.
A portion of the Paycheck Protection Loan can be forgiven on a tax-free basis. Payments for payroll costs, mortgage interest, rent, and utilities made during the 8-week period beginning on the date of the loan may be forgiven if the business does neither of the following:
- Reduces its workforce during the 8-week cover period when compared to other periods in 2019 or 2020, or
- Reduces the salary paid to an employee who had earned more than $100,000 by more than 25% during the covered period.
If the employer rehires or increases the employee’s pay within an allotted time period, this reduction in forgiveness would be avoided.
Small Business Loans (Economic Injury Disaster Loans)
The CARES Act expands access to Economic Injury Disaster Loans under Section 7(b) of the Small Business Act to not only businesses with fewer than 500 employees, but also to sole proprietors and ESOPs.
Under this program, the government will pay the principal and interest for 6 months for which payments are due.
A new Emergency Grant would be created to allow a business that has applied for a disaster loan to get an immediate advance of $10,000. This advance can be used to maintain payroll and is not required to be repaid even if the request for the 7(b) loan is denied.
Expanded Unemployment Insurance
Expansion of benefits for workers includes a $600 per week increase to benefits for up to four months and federal funding of benefits for the self-employed, independent contractor, and those with limited work history.
The federal government is incentivizing states to repeal any “waiting week” provisions that prevent unemployed individuals from getting benefits as soon as they are laid off by fully funding the first week of unemployment insurance for states that suspend the waiting periods.
The federal government will fund an additional 13 weeks of unemployment benefits through December 31, 2020 after individuals have run out of state unemployment benefits.
Retirement Accounts Used for Coronavirus Costs
Taxpayers will be allowed to take a “coronavirus-related” distribution of up to $100,000 in 2020 free from penalty (the 10% early withdrawal penalty would not apply).
The income attributable to those distributions would be subject to tax over three years beginning with 2020. The taxpayer can avoid income recognition by repaying the distribution received from the retirement plan within three years of receiving it.
The amount an individual can borrow from their retirement plan increases from $50,000 to $100,000 from the 180-day period beginning after the Act is enacted.
Eligible retirement plan accounts include IRAs, 401(k)s, certain deferred compensation plans, and qualified annuities.
Required Minimum Distributions (RMDs)
RMDs would be waived for 2020 only.
Changes to Charitable Contributions
Individuals would be able to take a $300 charitable contribution as a deduction in computing AGI (“above-the-line” deduction). Individuals would receive this deduction in addition to the standard deduction.
This above-the-line deduction is permanent. It is applicable for 2020 and beyond but is only available to a taxpayer who does not itemize their deductions.
The Act temporarily lifts the limits on charitable contributions for 2020. For cash contributions paid in 2020 the percentage income limit for corporations is increased from 10% of taxable income to 25% and for individuals there is not any AGI limitation at all. Contributions to private foundations and donor advised funds do not qualify for the increased limitation. The limitation on food inventory is increased from 15% to 25%.
Payroll Tax Credit for Employers (Employee Retention Credit)
Employers who hold onto employees during the COVID-19 pandemic would be eligible for a refundable payroll tax credit.
It would be available to employers whose businesses were disrupted due to virus-related shutdowns and businesses experiencing a decrease in gross receipts of 50% or more when compared to the same quarter last year.
For each eligible quarter the business will receive a tax credit against its 6.2% share of Social Security payroll taxes equal to 50% of the qualified wages paid to each employee for that quarter, ending on December 31,2020. The amount of qualified wages for each employee for all quarters may not exceed $10,000, and the credit begins to apply to wages paid after March 12, 2020.
If there were more than 100 employees during 2019, the qualified wages are limited to only those wages that were paid by the employer during the quarter for the period of time the business was shut down.
If there were less than 100 employees for 2019, all employees’ wages qualify.
Persons treated as a single employer under IRC Section 52(a) or (b), or 414(m) or (o) are treated as a single employer for purposes of the credit.
Any wages taken into account in determining the new payroll tax credit for family medical leave or sick leave as part of the Families First Coronavirus Family Relief Act may not be taken into account in determining qualified wages for the employee retention credit.
If the employer takes out a Paycheck Protection Loan as detailed on page 2 above, no employee retention credit would be available.
Payroll Tax Payment Delays (Including Self-Employment Tax)
With regard to the employer’s share of the 6.2% Social Security tax that would otherwise be due from the date of the Act’s enactment through December 31, 2020, 50% would be due December 31, 2021 and 50% would be due December 31, 2022.
A self-employed taxpayer can defer paying 50% of his or her self-employment tax that would be due from the date of enactment through the end of 2020 until the end of 2021 (25%) and 2022 (25%).
This deferral is not available to any business that takes out a Paycheck Protection Loan as detailed above.
Net Operating Losses (NOLs)
Losses from 2018, 2019, and 2020 will be permitted to be carried back for up to five years. Taxpayers will be permitted to forego the carryback and instead carry the loss forward.
For taxable years beginning before 2021, a taxpayer would be permitted to deduct 100% of loss carry forwards and carry backs.
For taxable years beginning after 2020, a taxpayer would be permitted to deduct 100% of loss carry forwards from years beginning before 2018, but loss carry forwards from years beginning after 2017 would remain subject to the 80% of taxable income limitation.
Loss Limitation for Non-Corporate Taxpayers
The Act temporarily repeals the Internal Revenue Code Sec. 461(l) excess loss limitation applicable to non-corporate taxpayers from tax years beginning after December 31, 2017 to tax years beginning after December 31, 2020. This was the provision that limited the “net business loss” that could be used to $250,000 (single) or $500,000 (married filing jointly).
As a result, if a taxpayer who had a loss limited by the provision in 2018 or 2019 they can file an amended return to claim a refund.
The Act clarifies that when the provision comes back for 2021, wages will not be considered business income.
Increased Interest Expenses
The Act would increase the adjusted taxable income percentage from 30% to 50% for 2019 and 2020.
Taxpayers can elect to use 2019 adjusted taxable income in computing its 2020 limitation (this becomes useful given that most businesses may not have taxable income in 2020).
Partnerships do not get to use the 50% of adjusted taxable income limited for 2019. Instead, any interest disallowed at the partnership level is passed out to the partners and is suspended at the partner level under the normal rules. In 2020, however, 50% of the suspended interest will be fully deductible, while the other 50% will remain suspended until the partnership allocates excess taxable income or excess interest income to the partner (or the partnership is no longer subject to Internal Revenue Code Section 163(j).
Qualified Improvement Property
The Act includes a technical correction treating qualified improvement property with a 15-year life, retroactive back to January 1, 2018, along with a 20-year class life for ADS purposes.
As a result, such property is eligible for immediate expensing. Taxpayers should be entitled to file amended returns to take the accelerated depreciation in 2018 and 2019.
Student Loan Debt
An employer can pay up to $5,250 in 2020 of an employee’s student loan debt on a tax-free basis. This applies to payments made after the enactment of the bill and before January 1, 2021.
This provision modifies existing Internal Revenue Code Sec. 127, which permits an employer to pay up to $5,250 of an employee’s educational expenses tax-free to the employee. The Sec. 127 limit is now combined with the new provision in the Act. The maximum amount that would be tax free to the employee would be $5,250.
The employee cannot deduct the interest expense that was considered a tax-free benefit paid by their employer.
The ACT suspends payments for student loans under the Federal Family Education Loan and Direct Loan programs – without interest – through September 30, 2020. Collection efforts for those loans will stop during that time, including any current garnishments and tax refund offsets.
Corporate AMT Credits
The Act accelerates the ability for companies to recover their AMT credits.
The Act amends the rules for high-deductible health plans and allows them to cover telehealth and other remote care services without charging a deductible.
Alcohol Used to Produce Hand Sanitizer
The Act waives the federal excise tax on any distilled spirits used for or contained in hand sanitizer produced and distributed consistent with guidance issued by the FDA.
Aviation Excise Taxes
The Act would suspend federal aviation excise taxes through the end of the year.
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