By: AnnaMarie Mock, CFP® & Edward J. Leach, CFP®, MBA
On Friday, March 27th President Trump signed the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), a $2 trillion emergency fiscal stimulus package designed to ease the economic strain caused by COVID-19. It is the largest economic stimulus package in US history.
The CARES Act is aimed to provide financial relief to individuals, small businesses, public health, corporations, and local governments.
With the CARES Act being over 880 pages long, we will focus on the provisions that will impact you, individuals and small business owners, directly which comprise of almost half of the $2 trillion stimulus.
Before reading further, we recommend prior to acting on any of the programs/initiatives within the CARES Act, in addition to HIGHLAND, you consult with your CPA, Banker, and potentially your attorney before making any decisions.
Much of this bill is still being analyzed and interpreted. What we have outlined below is the most up-to-date understanding of a portion of the workings of the bill that we believe are most important to you. We are actively involved speaking with our network of professionals to get clarity and details on each of the items in the bill.
Individuals:
Recovery Rebates: Under the CARES Act, $500 billion of the $2 trillion is allocated for eligible individuals to receive a one-time payment expected to start within the next three weeks. The proceeds will not be included as taxable income for 2020. You will either receive a check in the mail or direct deposit, depending on how prior tax refunds were received or taxes due were paid. For individuals collecting social security, this will be deposited into the same account where you received your social security income.
Who is eligible to receive a check and for how much?
If your AGI (adjusted gross income) is below the lower threshold based on your filing status, you will receive the full recovery amount. As your income exceeds the lower threshold, the amount you will receive is reduced up to the upper limit, so for every $100 over the limit, there will be a reduction of $5 of the eligible benefit amount.
In addition, any filers with children under the age of 17 will receive an additional $500 per child. For example, a married couple with one child is eligible for $2,900; however, if their AGI for 2019 was $175,000, they would only receive $1,650.
If you have not filed your 2019 tax returns, the AGI amount will be based on 2018 figures.
The Rebate Recovery check is essentially an advance on a tax credit, so for those who were not eligible to receive a check based on being above the income threshold in 2018 or 2019, but your income is reduced in 2020 below the threshold amount you would receive a tax credit reducing your 2020 tax liability.
Some takeaways:
For those that had higher income in 2019, you may want to delay the filing to take advantage of your lower income in 2018 to maximize the amount received assuming it is below the upper threshold. The deadline to file your 2019 taxes has been extended to July 15, 2020.
Likewise, if your income is lower in 2019, you may want to accelerate your tax return filing.
Required Minimum Distributions: Required minimum distributions (RMDs) for all account owners and beneficiaries with inherited accounts will be suspended for 2020. Therefore, no RMDs are required to be taken in 2020. Keep in mind the age to begin RMDs has been increased to age 72 by the SECURE ACT which took effect on January 1, 2020.
For those that turned 70 ½ in 2019 you would normally be required to take your 2019 RMD by April 1, 2020 and your 2020 RMD by December 31, 2020. However, because of the CARES Act, both RMDs are not required to be taken in 2020, and the account owner will only need to take one RMD amount in 2021.
It is possible to ‘return’ the RMD into the retirement account if the 2020 RMD has already been paid out. If the distribution happened within the last 60 days, the amount withdrawn can simply be transferred back into the account. For those that are past the 60-day window and can prove you were impacted by the coronavirus, you have up to three years from the distribution date to deposit the money back in. Inherited IRA owners that took the RMD for 2020 will not have the ability to return the money.
Coronavirus Related Retirement Account Distributions: Individuals that are in a federally declared disaster area can take Coronavirus-Related Distributions of up to $100,000 from IRAs and employer retirement plans in 2020. An impacted individual is someone that has been diagnosed with COVID-19, a spouse or dependent that was diagnosed, experienced adverse financial consequences by not being able to work, or full or partial closures for business owners.
For 2020 distributions, there will be no 10% penalty on the withdrawal if below the age of 59 ½ and no mandatory withholding on distributions. Individuals will have the option of repaying the withdrawn amount over three years starting on the day of the withdrawal resulting in no tax liability.
If the employer-sponsored retirement plans allow loans, the CARES Act increases the allowable loan amount to be the lesser of 100% of the vested balance or $100,000, which is up from the lesser of 50% of the vested balance and $50,000. Any payments on the loan can be deferred by one year.
Relief to Student Loan Borrowers: There are some new developments from last week’s article, “Cancellation of Student Loan Debt”. The CARES Act suspends federal student loan payments and no accrual of interest through September 20, 2020. This period of time will continue to count towards any loan forgiveness programs. You may want to contact your loan servicer to pause the payments up until September if your ultimate goal is loan forgiveness even if you were not financially impacted by the virus. If you are trying to pay the loan in full, you may want to continue to make full payments during this period because 100% of the payment will go towards principal.
Unemployment Benefits: Benefits have been significantly increased and extended for those that would normally be ineligible.
Self-employed individuals that are normally excluded for benefits will now be able to get up to 39 weeks of benefits. The one week waiting period has been eliminated, so benefits will be paid out immediately.
States will have the ability to increase their unemployment benefits up to $600 per week for four months paid with federally funded dollars. The average weekly unemployment amount nationwide is $400 weekly, so this can potentially increase the checks by 50%.
The benefit period has been extended by an additional 13 weeks.
There are short term compensation programs that are designed to provide relief for employees that have truncated hours and are not eligible for unemployment.
Small Businesses
Paycheck Protection Program: This program is 100% guaranteed by the Small Business Administration (SBA) that provides a fully or partially forgivable loan if applied for by June 30, 2020. Any businesses including sole-proprietors with less than 500 employees are eligible for the 7(a) small business loan up to a maximum of $10 million or 2.5 times the average monthly payroll costs from the prior year, whichever is less.
Payroll costs include salaries, wages, tips; vacation, medical or sick leave, health and retirement benefits, and state and local wage taxes. Payroll costs exclude compensation over $100,000 for any individual employee. The loan has a maximum interest rate of 4% over a 10-year term and the loan proceeds can be used for payroll costs, rent, mortgage interest and utilities.
Here are the keys to figuring out if your loan can be forgiven.
The amount eligible for loan forgiveness is based on the following calculation:
Average number of Full-time Employees for 8 weeks after loan date, divided by, Average number of Full-time Employees per month from February 15, 2019 through June 30, 2019 (can also use period January 1, 2020 to February 29, 2020)
In addition, a temporary reduction in head count made between February 15, 2020 and April 26, 2020 will not reduce forgiveness if corrected by June 30, 2020. In short, if you do reduce headcount, but hire those employees back prior to June 30, 2020 you will still be eligible for the loan forgiveness.
Forgiveness of the loan can also be reduced by any wage reduction in excess of 25% per employee.
For example, if you have an average of 10 Full-time employees for 8 weeks after you take out the loan, and during the period of 2/15/19 to 6/30/2019 or 1/1/2020 to 2/29/2020 you also maintained an average of 10 Full-time employees you would receive 100% loan forgiveness (10 divided by 10 = 1 (or 100%)).
If instead using this same case, you only maintained 5 Full-time employees during the 8 weeks after the loan you would only be eligible for a 50% forgiveness (5 divided by 10 = .5 (or 50%)).
The portion of the loan that is forgiven will not be treated as taxable income, nor will any interest be required to be paid on the portion forgiven.
How do you apply for the loan?
Unlike applying for traditional SBA Loans, these loans will actually be administered by the banks. If interested in applying for this loan, we recommend reaching out to the bank your business has a relationship with. At this point, the application process is unclear, but it is understood to be much simpler and streamlined in order to increase rate of approvals.
Economic Injury Disaster Loans: Although not actually a new program under the CARES Act the Economic Injury Disaster Loans or otherwise known as SBA 7(b) Loans has been enhanced by the CARES Act.
If you are located in a “Disaster Area”, all states at this point, and qualify as a small business under SBA size standards or operate as a nonprofit organization, you can apply for a loan of up to $2 million with a maximum 30-year amortization. The interest rate for small businesses are 3.75% and for nonprofits 2.75%.
The funds can be used for regular business expenses, but cannot be used for refinancing existing debt, making distributions to owners, or paying federal, state, or local tax penalties.
One of the features of this loan is you may receive an immediate advance of $10,000 which does not need to be repaid. It also appears that if your loan ends up being denied you still do not need to repay the advance.
If you have already applied for this loan, and received it you can transfer this loan into a 7(a) loan which may be eligible for forgiveness under the Paycheck Protection Program as long as all criteria is satisfied. This however is something that still needs to be clarified.
In terms of underwriting, under the CARES Act, certain requirements have been waived like having to be in business at least 1-year, or any personal guarantees on loans. Now businesses can be approved based on credit score alone without the need to submit tax returns.
How do you apply for the loan?
Go direct to the SBA website, and apply. You can also consult your bank and/or CPA as they may have experience with applying and can assist with the loan application.
Employee Retention Credit: To encourage businesses from further layoffs, there is a new payroll tax credit for businesses that are not receiving a loan under 7(a)(36) of the Small Business Act. The credit is equal to 50% of wages paid to each employee up to $10,000 per employee for wages paid between March 12, 2020 ad January 1, 2021.
A company may be eligible if operations have been fully or partially suspended during a quarter due to government intervention or revenue in a quarter in 2020 is 50% from the same quarter in 2019. Businesses that do not qualify for the credit now will have two more opportunities to meet the requirement by the end of 2020:
A quarter is suspended without government required suspension
The business remained open but the gross revenue from the current quarter is reduced by 50% compared to the calendar quarter. This is available until gross revenue exceeds 80% gross revenue from the same quarter in 2019.
Deferral of Payment of Payroll Taxes: Business that do not have debt forgiven under the CARES Act can defer 50% of the employer paid payroll taxes payments until December 31, 2021 and the remaining 50% until December 31, 2022. Self-employed individuals will, also, be able to participate in this provision.
Please do not hesitate to reach out to your HIGHLAND team with any questions regarding the CARES Act, and how it can impact your planning. We will be in touch individually with clients throughout the coming days, but please reach out to us if there is an immediate issue we need to address.
Author Bio’s
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.