The Cares Act (Act) and Its Impact on Individual Taxpayers and Small Businesses

The Act authorizes $2.1 trillion in aid to reduce the economic impact of the Covid-19 pandemic. This legislation provides relief for individuals and businesses that have been negatively impacted by the COVID-19 outbreak. The Act* includes the following key provisions:

Individual Taxpayer Provisions:

Direct Payments: Individual taxpayers receive a one-time payment of up to $1,200, and married taxpayers receive $2,400, plus an additional $500 per child. The full payments are available for individual taxpayers with no children with adjusted gross incomes (AGI) up to $75,000 and married taxpayers filing jointly with no children with $150,000 of AGI. The payments are fully phased out for individuals with no children at $100,000 of AGI and married couples with no children at $200,000 of AGI.

While these payments are advanced to taxpayers based on either their 2018 or 2019 tax return, they are based on the 2020 tax year. This means that taxpayers eligible for a larger payment based on 2020 income will receive it when they file their 2020 income tax return. However, taxpayers with higher incomes in 2020 will not have their overpayment clawed back. For example, a single taxpayer with $100,000 of AGI in 2019 income would not receive a payment but would receive the $1,200 credit on their 2020 return if their income for the year fell below the phaseout. On the other hand, if a single taxpayer with $45,000 in income in 2019 receives a $1,200 advance payment this year, he or she will not have to repay the advanced payment even if the taxpayer’s AGI exceeds $100,000 in 2020.

Expanded Unemployment Insurance (UI): The Act authorizes $250 billion for an extended unemployment insurance program and offers workers an additional $600 per week for four months. This payment is in addition to the benefits provided under state unemployment programs. The federal government is incentivizing states to repeal any provisions that prevent unemployed workers from receiving benefits as soon as they are laid off by fully funding the first week of UI for states that suspend such waiting periods. Additionally, the Act funds an additional 13 weeks of unemployment benefits through December 31, 2020 after workers have run out of state unemployment benefits. The Act also provides federal funding of UI benefits provided to those not usually eligible for UI, such as the self-employed, independent contractors, and those with limited work history.

Access to Retirement Funds: The Act waives the 10% early withdrawal penalty for retirement plan distributions up to $100,000 made in 2020 to an individual (i) who is diagnosed with COVID-19; (ii) whose spouse or dependent is so diagnosed; or (iii) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced due to the virus or as a result of the closing or reduction of hours of a business due to the virus. Withdrawals are still subject to income tax, but the taxes are spread ratably over three years, unless otherwise elected. Taxpayers also have a three-year period following the distribution to recontribute the withdrawn amount into their retirement accounts to avoid taxation.

Loans from Qualified Plans: The maximum loan permitted from a 401(k) plan is increased from the lesser of $50,000 or one-half the present value of the participant’s nonforfeitable accrued benefit to the lesser of $100,000 or the present value of the participant’s nonforfeitable accrued benefit. The Act also delays for one year the due date for outstanding loans that would otherwise be due in 2020.

Required Minimum Distributions (RMDs) Suspended for Defined Contribution Plans: RMDs from IRAs and 401(k) plans are suspended for 2020, allowing for a further deferral of taxes, and giving additional time for account balances to recover.

Expansion of the Charitable Deduction: The Act permits non-itemizing taxpayers to deduct up $300 of cash charitable contributions in 2020. Also, the limits on charitable contributions are changed in 2020, allowing itemizing taxpayers to take charitable deduction on cash contributions without regard to the 60% of AGI limitation. The corporate charitable deduction on cash contributions in 2020 is also increased from 10% to 25% of the company’s taxable income.

Student Loans: Certain employer payments of student loans on behalf of employees are excluded from taxable income. Employers may contribute up to $5,250 annually toward student loans, and the payments would be excluded from an employee’s income. The Act also suspends all payments and accrual of interest due for student loans made under the Federal Direct Loan Program and the Federal Family Educational Loan Program through September 30, 2020.

Business Provisions:

Paycheck Protection Program (PPP): $350 billion is provided for the PPP to help small businesses (fewer than 500 employees) impacted by the pandemic and the economic downturn to make payroll and cover other expenses. Small businesses may take out loans – limited by a formula based upon payroll costs – and can cover employees making up to $100,000 per year. Loans may be forgiven if a firm uses the loan for payroll, interest payments on mortgages, rent, and utilities. These loans are designed to prevent layoffs and business closures while workers stay home during the outbreak.

Payroll Tax Credit: Employers are eligible for a 50 percent refundable payroll tax credit on wages paid up to $10,000 during the crisis. The credit is available to employers whose businesses were disrupted due to virus shutdowns and those that had a decrease in gross receipts of 50 percent or more when compared to the same quarter last year. The credit can be claimed for employees who are retained but not currently working due to the crisis for firms with more than 100 employees, and for all employee wages for firms with 100 or fewer employees.

Tax Credits: Firms with tax credit carryforwards and previous alternative minimum tax (AMT) liability can claim larger refundable tax credits than they otherwise could.

Payroll Taxes: The Act permits employers to delay the payment of the employer portion of the 2020 payroll taxes until January 1, 2021, with 50 percent of the delayed payments due on December 31, 2021 and the other half due on December 31, 2022.

Net Operating Losses (NOLs): The 2017 Tax Cuts and Jobs Act (TCJA) prohibited most corporate taxpayers from carrying back net operating losses (NOLs) to offset a previous year’s taxable income and limited the NOLs that can be deducted in any year to 80% of taxable income. The Act permits taxpayers to carry back 2018, 2019, and 2020 NOLs for up to five years. The NOL limit of 80 percent of taxable income is also suspended, so firms may use NOLs they have to fully offset their taxable income.

Excess Loss Limitations: The excess loss limitation rules for pass-through entities which precludes the business from deducting net business losses more than $250,000 is repealed for the 2018 and 2019 tax years.

Net Interest Deduction Limitation: The net interest deduction limitation, which currently limits businesses’ ability to deduct interest paid on their tax returns to 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA), 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.

Loans and Loan Guarantees to Eligible Businesses: The Act provides $500 billion to the Secretary of the Treasury to make loans, loan guarantees, and other investments in support of eligible businesses. These loans are not to exceed five years in term and cannot be forgiven. This includes $25 billion in lending for passenger airlines, $4 billion in lending for cargo air carriers, and $17 billion in lending for firms deemed critical to U.S. national security. Firms taking loans must not engage in stock buybacks for the duration of the loan plus one year and must retain at least 90 percent of its employment level as of March 24, 2020. Loans also come with terms limiting employee compensation and severance pay.

Hospitals and Health Care: The Act provides over $140 billion in appropriations to support the U.S. health system, $100 billion of which will be injected directly into hospitals. The balance will be used to provide personal and protective equipment for health care workers, testing supplies, increased workforce, and training, accelerated Medicare payments, and for supporting the CDC. In addition, all testing and potential vaccines for COVID-19 will be covered at no cost to patients.

States and Local Governments: $150 billion is allocated for state and city government expenditures incurred due to dealing with the coronavirus public health emergency. The fund is allocated by population, with a minimum of $1.25 billion for each state.

Summary: The Cares Act along with an extremely accommodative monetary policy has been largely responsible for keeping the U.S. economy afloat. A second stimulus package has been bogged down in Congress and its future fate uncertain. The unknown is whether the American consumer will be able to weather through this COVID-19 storm and what long-term damage to the economy will occur if the federal government fails to provide another round of fiscal stimulus this year.

To view the full text of the Act, please click the link below:ón

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