Last month’s Coronavirus Aid, Relief, and Economic Security (CARES) Act marked the largest economic stimulus plan in history.
This Act is intended to assist businesses and individuals during this period of uncertainty surrounding COVID-19. Earlier this month, I — along with Jessica Zeratsky and Kirstin Salzman, partners at Husch Blackwell — shared with clients an overview of the act, individual provisions that may benefit them, and major programs that are available from the Small Business Administration.
A part of Gatewood Wealth Solution’s commitment to serve as a resource for the broader community during this time, we wanted to also share our insights and updates here. Feel free to share with anyone you think could benefit.
The CARES Act at a Glance
The CARES Act covered many categories, but our presentation and this update will focus on the individual and business relief. Below, please see a quick summary and update on individual relief, which includes recovery rebates and the waiver of required minimum distributions (RMDs).
Individual Relief: Stimulus Checks
All U.S. residents with adjusted gross income up to $75,000, or $150,000 for married filing jointly, are eligible for a full rebate in the amount of $1,200 or $2,400, respectively. The individuals must not be dependents of another taxpayer and must have a work eligible social security number. The rebate is phased out by $5 for every $100 of adjusted gross income over those amounts and is phased-out completely for incomes exceeding $99,000 for a single filer, $146,000 as a head of household with one child, or $198,000 for a joint filer with no children. In addition to that payment, if the individual or couple are within the adjusted gross income limits and have a child under the age of 17, they are eligible for an additional $500 per child.
According to the new law, the IRS is going to look first to your 2019 tax return to compute the payment. If no 2019 return has been filed, the IRS will look to your 2018 return instead. This is important, as you could potential qualify for this rebate one year, but not the other. For example, if your income in 2019 is over those AGI thresholds, but your income in 2018 was under the thresholds, you may want to wait to file your return closer to the new July 15 deadline. Alternatively, if your income was under the threshold in 2019 and you recently had a child, you should file your tax return as soon as possible so that you get the additional $500.
These rebates are considered an advance of a 2020 tax return credit. So, even if you did not qualify based upon your most recently filed tax return, you can still qualify for this credit depending on your 2020 adjusted gross income, in which case the credit would be provided once you file your taxes in 2021. With that being said, if you received a rebate based on your 2018 or 2019 adjusted gross income and your 2020 AGI would have disqualified you, you do not have to pay the rebate back.
Last week this Treasury Department and the IRS reported that 88.1 million payments worth nearly $158 billion had been issued in the program’s first three weeks. The first wave of payments included individuals and couples who had filed either a 2018 or 2019 federal return and received a refund. However, the IRS cannot make direct deposits into bank accounts used to make electronic tax payments, even if that account information is known to the agency. In early May, the IRS will start mailing paper checks to households, at a rate of 5 million per week. The paper checks will first go to the households with the lowest adjusted gross incomes and continue upwards.
A great resource for checking on your payment or to provide the IRS your direct deposit information to expedite your payment, please visit the Get My Payment tool on the IRS website. Get My Payment is updated once daily, shows the projected date a deposit has been scheduled, and allows you to update direct deposit information if you did not use a direct deposit on your last tax refund. If you have had trouble accessing the Get my Payment tool to check on the status of your stimulus payment, you may want to try again as the IRS announced on Sunday it had made “significant enhancements” to the web portal, which first went live on April 15.
Individual Relief: Required Minimum Distributions
The CARES Act waives required minimum distributions (RMDs) for 2020. This applies to any account owner who is 72 or older in 2020, any account owner who turned 70 ½ in 2019 who did not take his or her RMDs in 2019 and planned to take his or her delayed RMDs by April 1, 2020, and all beneficiaries of inherited IRAs for individuals who passed away prior to 2020.
If you have already taken your 2020 RMD, the IRS has extended the 60-day rollover deadline to July 15, 2020, for distributions, including RMDs, for which the 60-day rollover deadline would’ve fallen between April 1, 2020, and July 15, 2020. As a result of this extension, individuals who received an RMD between February 1, 2020, and May 15, 2020, likely have until July 15, 2020, to complete the rollover. If you took a January distribution, unfortunately it doesn’t fall within the extended rollover window.
This means that there are now additional opportunities for tax planning if the Required Minimum Distribution amount is not needed to fund expenses. One possible tax strategy is to convert the amount of the RMD that would have been taken from the Traditional IRA to a Roth IRA that no longer needs to be taken this year due to the 2020 RMD waiver. This way, you would be able to move some funds to a tax-exempt environment while maintaining your anticipated level of taxable income. Another example of using this waiver in a tax efficient manner is to take only the amount of distribution that would bring your income up to the top of a tax bracket you are in, without going over that tax bracket (which would push you into the next, higher tax bracket). This is a strategy called tax bracket management.
Small Business Owner Opportunities: Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL).
The small business relief portion of the CARES act focused on two main vehicles: Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL).
The purpose of the PPP is to enable small businesses to keep their employees on payroll by providing forgivable loans to pay for payroll-related expenses. It is administered by the Small Business Administration and is intended to help keep small businesses, who are experiencing hardship due to COVID-19, afloat during these difficult times. Applications opened April 3 for small businesses and sole proprietors and April 10 for independent contractors and self-employed. The eligibility requirements included:
- A small business with fewer than 500 employees
- A 501(c)(3) with fewer than 500 employees
- Sole proprietor
- Independent contractor
- A self-employed individual who regularly carries on any trade or business
- A 501(c)(19) Veterans Organization that meets the SBA size standard
- The borrower was in operation on February 15, 2020; either the borrower had employees for whom it paid salaries and payroll taxes, or it paid independent contractors; and with respect to loan deferrals, the borrower was adversely impacted by COVID-19 (although this requirement is presumed).
Businesses were eligible for the lesser of $10,000,000 or 2.5 times the average monthly payroll over the trailing 12 months or the 2019 – 2020 calendar year. Payroll expenses include:
- Salary, commissions, wages, or tips (capped at $100,000 for each employee, “annual salary of $100,000 applies only to cash contribution, not to cash-benefits, such as employer contributions to retirement plans, healthcare, and state and local taxes)
- Employee benefits, including vacation, parental, family or medical paid leave
- Group health costs, including premiums
- State and local taxes assessed on employee compensation
In order for the loan will be fully forgiven, at least 75% of the loan is used on payroll expenses and you must have the same number of employees earning the same wage as February 15, 2020 when applying for forgiveness. The other 25% can be used on interest on mortgage obligations which incurred before February 15, 2020; rent, under lease agreements in force before February 15, 2020; and utilities, for which service began before February 15, 2020.
You must apply for the loan to be forgiven after an eight-week period of time. The eigh -week period test begins on the date that the lender makes the funds available to the borrower. The lender must make the disbursement of the loan no later than ten calendar days from the date of the loan approval. Loan forgiveness ultimately is determined by your lender, so please ensure that you keep meticulous records and that you maintain headcount.
Unfortunately for many small businesses, the entire $349 billion set aside for small businesses from the PPP was depleted by April 16 which left many small businesses distraught at their lack of receipt of aid. President Donald Trump signed the $484 billion COVID-19 rescue bill on Friday, April 24, which includes $310 billion in new money for the Paycheck Protection Program. The Small Business Administration (SBA) is set to take applications for the second round as of 10:30 a.m. on Monday, April 27.
Small Business Owner Opportunities: Economic Injury Disaster Loan (EIDL)
The Economic Injury Disaster Loan Program (EIDL) provided up to $2 million of financial assistance (actual loan amounts are based on amount of economic injury) to small businesses or private, non-profit organizations that suffer substantial economic injury as a result of the declared disaster, regardless of whether the applicant sustained physical damage.
The EIDL was meant to help businesses meet necessary financial obligations that your business or private, non-profit organization could have met had the disaster not occurred. It provided relief from economic injury caused directly by the disaster and permits you to maintain a reasonable working capital position during the period affected by the disaster.
Unfortunately, the SBA is unable to accept new applications at this time for the Economic Injury Disaster Loan (EIDL)-COVID-19 related assistance program (including EIDL Advances) based on available appropriations funding.
Applicants who have already submitted their applications will continue to be processed on a first-come, first-served basis.
Other Small Business Resources
Also available to small businesses are the Employee Retention Credit Refundable Tax Credit and Employer Payroll Taxes Delay of Payment.
Employee Retention Credit – Refundable Tax Credit
The Employee Retention Credit provides refundable tax credit for 50% of wages paid by employers to employees. It is available to employers whose 1) operations were fully or partially suspended due to the coronavirus or 2) gross receipts declined by more than 50% when compared to the same quarter in the prior year. It is available to be claimed on a quarterly basis but caps at $10,000 (including health benefits) in total per employee for all quarters.
The credit is based on “qualified wages paid.” For employers with more than 100 full-time employees, qualified wages are paid when employees are not providing services due to the above. For employers with 100 or less full-time employees, all employee wages qualify for the credit even if the business is open. The credit provided for the first $10,000 of compensation (including health benefits) paid to an eligible employee. Credit provided for wages paid or incurred from March 13, 2020 to December 31, 2020
Employer Payroll Taxes - Delay of Payment
This ruling allows deferral of payment of employer’s 6.2% share of Social Security tax and self-employed 50% equivalent of payroll taxes. It is paid over the next two years: half due by December 31, 2021 and half due by December 31, 2022. Please note that participating in the Paycheck Protection Program (loan) does disqualify you from deferring the employer payroll taxes and from taking the employee retention credit.
A lot was included in the CARES Act, and as the resources and news surround the act continue to evolve, we will share relevant updates and planning strategies. Gatewood Wealth Solutions is committed to serving as a resource for our community during this time, and we welcome any questions or discussion points you may have.
The content provided herein is based on our interpretation of the CARES Act and I not intended to be legal advice or provide a tax opinion. The document is a summary only and not meant to represent all provisions within the CARES Act.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.