On Friday, March 27, Congress gave final approval to the $2 Trillion Coronavirus Rescue Package (CARES Act) and the president signed it into law.
As with all complex legislation, we need time to digest all of the intricate details and will provide more specifics in the days to come. For now, here is a high-level overview of what we know.
The relief package includes:
- Direct cash payments to Americans through the tax system
- Expanded unemployment insurance
- Paycheck protection programs to allow small businesses to retain their employees
- Loans and aid to businesses and hospitals
- Access to retirement funds without penalties for certain individuals
Among the key provisions:
- A one-time payment of up to $1,200 for individuals and $2,400 for couples AND $500 added for each child. The benefit starts to phase out above $75,000 in income for individuals and $150,000 for couples, up to a threshold of $99,000 for individuals and $198,000 for joint filers.
- $250 billion for unemployment insurance, increasing payments by $600 per week for 12 weeks and expanding eligibility from 26 to 39 weeks. This also includes self-employed people and independent contractors, such as “gig economy” workers like Uber drivers.
- Federal student loan payments are suspended through the end of September 30, with no interest accrual.
- Financial hardship forbearance on a federally backed mortgage loan of up to 60 days, which can be extended for 120 days.
- Waives the 10% early withdrawal penalty tax under IRC Sec. 72(t) on early withdrawals up to $100,000 from a retirement plan or IRA for an individual who is diagnosed with COVID-19; whose spouse or dependent is diagnosed with COVID-19; who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary. The legislation also permits those individuals to pay tax on the income from the distribution ratably over a three-year period and allows individuals to repay that amount tax-free back into the plan over the next three years. Those repayments would not be subject to the retirement plan contribution limits.
- Doubles the current retirement plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance in the plan. Individuals with an outstanding loan from their plan with a repayment due from the date of enactment of CARES through Dec. 31, 2020, can delay their loan repayment(s) for up to one year.
- Temporarily waives of required minimum distribution rules for certain retirement plans and accounts. This provision waives, for the 2020 calendar year, the required minimum distribution rules for certain defined contribution plans (not defined benefit plans) and IRAs. The legislation also includes special rules regarding the waiver period to, in essence, hold harmless those individuals (and plans) who took advantage of the RMD waiver for 2020.
- Allowance of partial above-the-line deduction for charitable contributions and modification to limitations on charitable contribution during 2020. This provision encourages contributions to charitable organizations during 2020 by permitting an above-the-line deduction of up to $300 for cash contributions, whether an individual itemizes their deductions or claims the standard deduction.
- A $500 billion fund for loans and stimulus, including $58 billion for the airlines and $425 billion for other businesses and state and municipal governments.
- $221 billion in business tax breaks.
- $350 billion for small businesses, which includes forgivable loans.
- Employers are eligible for up to a 50% refundable payroll tax credit on wages paid during the crisis. Known as the “employee retention credit,” employers that had to fully or partially suspend operations because of an order by the government or had a significant reduction in gross receipts. The credit is only available if (1) operations were fully or partially suspended, due to a COVID-19 related shut down order or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year through the earlier of the fourth quarter of 2020 or the end of the quarter during which gross receipts are at least 80% of gross receipts for the same quarter of the prior year. The maximum refundable credit is 50% of up to $10,000 of eligible wages. Businesses with over 100 employees are eligible only with respect to wages paid for employees that were not providing services to the employer due to the reasons stated above. A trade or business with 100 or less employees is eligible for the credit regardless of whether the employee is providing services to the employer or not. For companies with over 100 employees, the credit is only available if (1) operations were fully or partially suspended due to a COVID-19 related shutdown order or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year.
- Delay payroll tax for employers, requiring half of the deferred tax to be paid by the end of 2021 and the other half by the end of 2022.
- Excess business losses: The TCJA generally limited business losses on an individual’s income tax return to $500,000. For 2018, 2019 and 2020 the excess business loss limitation has been suspended. Taxpayers do not have the option of suspending or not, so this provision will result in affected taxpayers either amending their 2018 return to claim a higher loss or foregoing the loss carryforward to 2019.
- Expands NOL carrybacks: 2018, 2019, 2020 NOLs to be carried-back five tax years to fully offset taxable income.
- Increases the amount of interest expense businesses are allowed to deduct, to 50% of taxable income, for 2019 and 2020.
- “Qualified improvement property” classified as 15-year property under MACRS, which accelerates cost recovery and makes it eligible for bonus depreciation.
- Modification to charitable contribution limitation for 2020. This provision increases the limitation on charitable contribution deductions. For corporations, the “10% of taxable income” limitation is increased to “25% of taxable income” for the 2020 tax year. Additionally, the limitation on deductions for contributions of food inventory is increased, from a 15% limitation to a 25% limitation.
- This provision also increases the limitation on charitable contribution deductions by individuals who itemize deductions. Additionally, the “50% of adjusted gross income” charitable contribution deduction limitation is suspended for 2020.
- Temporary repeal of Federal Aviation Excise Tax. This provision temporarily repeals, as of the date of enactment through December 31, 2020, Federal excise taxes collected in commercial aviation with respect to the transportation of persons, the transportation of property, and aviation fuel.
- Provides single-employer defined benefit plan funding relief by giving companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until Jan. 1, 2021. At that time, contributions due earlier would be due with interest.
We are actively analyzing the nearly 900 pages and will continue to dig into the specifics. We assure you we will send out more communication as the information becomes available. More importantly, as we learn more, we will be better able to advise you on how the CARES Act impacts you. Like all complex legislation, the implementation will evolve and we will help ensure that you and your business receive the optimum benefits available under this relief act.
PKS & Company, P. A. is a full service accounting firm with offices in Salisbury, Ocean City and Lewes that provides traditional accounting services as well as specialized services in the areas of retirement plan audits and administration, medical practice consulting, estate and trust services, fraud and forensic services and payroll services and offers financial planning and investments through PKS Investment Advisors, LLC.