COVID-19 Legislative Action – Part 2
Episode 67 – As a result of the economic impact that the novel coronavirus has had on this country, on March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. This far-reaching legislation stands as the largest emergency aid package in U.S. history. Here’s a summary of the CARES Act provisions.
Part 2 Transcript
As a result of the economic impact that the novel coronavirus has had on this country, on March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. This far-reaching legislation stands as the largest emergency aid package in U.S. history. It represents a massive financial injection into our economy with provisions aimed at helping American workers, small businesses and industries struggling with the economic disruption.
Prior to the CARES Act, the federal government had already enacted a series of laws to stimulate the economy and to increase efforts to fight the virus. The Coronavirus Preparedness and Response Supplemental Appropriations Act was signed into law on March 6, 2020, and the Families First Coronavirus Response Act was enacted on March 18.
The IRS also published Notice 2020-18 to confirm an announcement that U.S. Treasury Department Secretary Steven Mnuchin made over a week ago extending the income tax filing and payment deadline for tax year 2019 from April 15 to July 15. For taxpayers expecting a refund, the IRS has requested that tax returns be filed as soon as possible since refunds are still being issued within a targeted 21-day time frame. Also, Forms 4686 and 7004, which are the forms typically required to request an extension to file depending upon the circumstances, are not required.
Extension of the tax-filing deadline also extends the time to make IRA contributions for 2019 to July 15.
Please check our website for Part 1 summarizing the two bills.
CARES Act
The CARES Act is a historic bill featuring the largest economic stimulus package in American history, amounting to approximately $2.2 trillion in aid. After much bi-partisan negotiation between the House of Representatives, Senate, and the Presidential Administration, the bill passed the Senate unanimously on March 25. The House endured a bit of last-minute drama as Representative Thomas Massie of Kentucky forced members to return to Washington, D.C., for a procedural vote. Ultimately, the bill passed the House by voice vote on March 27, and President Trump quickly signed it into law.
The following is a brief summary of some of the provisions of the law impacting our clients and policyholders. Note that because of the speed in which this legislation was passed through Congress and signed by the President, there are some provisions that will need clarification and additional guidance by the Treasury Department and the IRS.
Assistance to Individuals and Families
1. Unemployment Assistance. Unemployment benefits will be expanded to increase the maximum benefit to $600 per week for up to 4 months. In addition, assistance will be provided to those who traditionally are not eligible for unemployment benefits, such as self-employed individuals and part-time workers. Up to 13 weeks of additional assistance may be available after exhausting state benefits.
2. Rebates. Direct payments of $1,200 will be made to individuals; $2,400 for married couples; and an additional $500 per dependent child under the age of 17. However, there will be a phaseout based upon adjusted gross income (“AGI”). For individuals, the phaseout range is $75,000 to $99,000. For married couples, it is $150,000 to $198,000. For heads of household, it is $112,500 to $146,500.
Importantly, generally no action will be required in order to receive the direct payment. The IRS will use the taxpayer’s 2019 tax return, if filed, or the 2018 return. A recalculation will automatically be done based upon the 2020 tax return. As you can see, in most cases, the rebate will depend upon the filing of a tax return, so even low-income earners who are not required to file, now need to file. Individuals who receive Social Security or veterans’ benefits are exceptions to the tax return requirement. Note, however, that taxpayers eligible for a larger rebate based on 2020 income will receive it as a credit in the 2020 tax season. The rebates will be treated as advance refunds of a 2020 tax credit. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the rebate they receive.
The IRS is expected to start distribution of the checks within three weeks, primarily through electronic means, if possible, if a taxpayer had indicated a bank account in their tax return for payments and refunds. It will follow up with a letter sent by mail to the taxpayer’s last known address indicating how the payment was made, the amount and a phone number at the IRS to report any failure to receive the payment.
3. Waiver of Qualified Plan Distribution Penalty. Under normal circumstances, withdrawals from a qualified plan or IRA prior to age 59 ½ are subject to a 10 percent penalty (with limited exceptions). The bill would waive that penalty for withdrawals up to $100,000, made after January 1, 2020, up to December 31, 2020, for coronavirus-related purposes applied to the taxpayer, spouse or dependent. However, income taxes would still be owed but may be paid over a three-year period. Purposes would include inability to work due to quarantine, layoffs, reduction in work hours, inability to obtain childcare, and other factors. Note that the withdrawal will need to be recontributed to the plan or IRA within three years, regardless of any contribution cap for that particular year.
4. Qualified Plan Loans. Individuals who have an existing plan loan that is due during the time the CARES Act is enacted and the end of the year, can delay that repayment for up to one year. The maximum loan amount is increased from the lesser of $50,000 or 50 percent of the vested account balance up to the lesser of $100,000 or 100 percent of the vested account balance for plan participants, or their spouse or dependents, who are diagnosed with COVID-19 or sustain adverse financial consequences due to quarantine, reduced work hours, layoffs, business closures and inability to find childcare.
5. Waiver of Required Minimum Distributions (RMDs). RMDs are waived for 2020 for those individuals who would otherwise be required to take an RMD. That is a significant provision for individuals over age 72 because of the severe decline in the stock market impacting IRAs and qualified plan balances.
6. Charitable Contributions. Americans are encouraged to contribute to charitable organizations by permitting above-the-line deductions of up to $300 of cash contributions in 2020, whether they itemize their deductions or not. For taxpayers who itemize, the AGI limitations are suspended for 2020 such that charitable contributions up to 100 percent of AGI (normally up to 50 percent) may be deducted. Contributions to donor-advised funds will not qualify.
7. Home Foreclosures. Homeowners who have a federally backed mortgage would be protected from foreclosures for up to 180 days. Most mortgages for the average homeowner are federally backed by Fannie Mae (“Federal National Mortgage Association”), Freddie Mac (“Federal Home Loan Mortgage Corporation”), the Veterans Administration and the Federal Housing Administration.
8. Student Loans. Payments on student loans are suspended through September 30, 2020, without penalty or interest. Also, businesses are encouraged to create a student loan repayment employee benefit plan. Employers may contribute up to $5,250 annually per employee, and such payment would be excluded from the employee’s income, and any taxes that may have been assessed against the employer are waived. The monetary limit also applies to any other educational assistance that was provided by the employer under current law. This provision applies to employer payments made after the enactment of the CARES Act and before January 1, 2021.
9. Real ID. The Real ID program prohibits state driver’s licenses from being used as identification when passing through TSA checkpoints at airports, unless the license meets new security features. The deadline for enhanced driver’s license security will be extended by a year to October 1, 2021.
Assistance to Small Businesses
1. Business Loans. There are several provisions in the CARES Act for business loans.
- $349 billion will be made available to support the Small Business Administration’s (“SBA’s”) Paycheck Protection Program (“Paycheck”) to help small businesses retain employees. Companies with 500 employees or fewer can borrow up to $10 million through December 31, 2020, based upon a formula dependent upon payroll and other restrictions. These loans are also available to sole proprietors, nonprofits and self-employed individuals.
- Paycheck loans may be forgiven if used for certain purposes such as payroll, rent, utilities and interest payments on mortgages during the eight-week period beginning on the date of origination of the loan, subject to certain limitations.
- $17 billion will be made available to the SBA requiring it to pay principal, interest and fees on existing SBA loans (e.g., 7(a) and 504 plan loans) for six months starting from the next payment due date.
- Another $10 billion will be provided to the SBA to fund its Emergency Injury Disaster Loan program. The program is aimed at small employers with fewer than 500 employees including sole proprietors and independent contractors. These businesses can get expedited access to money through an Emergency Grant for up to $10,000 received within three days of application to maintain payroll and related expenses. Because these payments are grants and not loans, they are not required to be repaid. This program will be available until the funds are exhausted.
2. Payroll Taxes. As an incentive to keep employees on the payroll, the Act provides for a refundable payroll tax credit on 50 percent of wages paid, up to $10,000, by employers whose operations were fully or partially suspended due to a COVID-19 shutdown order, or whose gross receipts declined by more than 50 percent compared to the same quarter last year. Certain requirements and restrictions are made depending upon whether the employer has more than, or fewer than, 100 employees, and if certain SBA loans such as the Paycheck Protection Loan are being utilized.
3. Social Security Payroll Tax. The Act allows employers and self-employed individuals to defer payment of the employer’s share of the Social Security tax paid on employee wages over the next two years, with half payable by December 31, 2021, and the balance by December 31, 2022.
4. Net Operating Losses. Companies that have net operating losses (“NOL”) in 2018, 2019, or 2020 will be able to carry back those losses for five years. In addition, the NOL limit is normally 80 percent of taxable income, but that rule is suspended for those years. Companies may use NOLs to fully offset their taxable income.
5. Net Interest Deduction Limitation. The net interest deduction limitation currently allows businesses to deduct interest paid on their tax returns to 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA). Under the Act, the limit has been expanded to 50 percent of EBITDA for 2019 and 2020. This will help businesses increase liquidity if they have debt or must take on more debt during the crisis.
Other Assistance
Among the many provisions of this Act are provisions to provide loans to large corporations, particularly airlines, air cargo firms and businesses deemed critical to U.S. national security, provided they do not use the loans for stock buybacks or to pay dividends. Other provisions are included to provide funding to support hospitals, medical centers and others to continue the detection and treatment of patients afflicted by the virus; to ensure the production and delivery of medical supplies to combat the virus; and to speed work on virus-related vaccines, treatments and therapies.
An additional $150 billion is being made available to support state and local government programs that fund disaster relief; assist public transit agencies; enable colleges and schools to continue educating; and to help cover overtime costs and medical supplies for first responders.
Conclusion
There are many provisions in the CARES Act that will help individuals, families and small businesses. While this is the largest stimulus bill ever proposed in American history, many economists believe that more will need to be done to combat the virus and jumpstart the economy. As legislative developments occur, we will be sure to let you know how they may impact you, your family and your business.
This information does not, and is not intended to, provide any legal, medical, tax or other financial advice and should not be relied upon by you in that regard. You are strongly encouraged to consult with your own medical and professional advisor(s) about your individual circumstances.